CBD demand records weakest result since the pandemic

• The Melbourne CBD recorded the weakest quarterly net absorption result since Q4 2020, totalling -68,300 sqm. This was predominantly led by large tranches of sublease space being brought to market (such as from the telecommunications sector) and one significant occupier decentralisation. Headline vacancy increased to 18.2%. 
• The Melbourne Fringe recorded positive net absorption of 19,100 sqm, while the S.E.S. remained relatively stagnant at -1,500 sqm. As a result of one Fringe completion being brought to market vacant, headline vacancy increased to 15.5%, and the S.E.S vacancy rate increased to 12.2%.

Multiple completions in the CBD and Fringe

• There was one project completion in the CBD, with the refurbishment of 500 Bourke Street reinstating 44,890 sqm back into the CBD market. There were two Fringe completions totalling 50,853 sqm, while the S.E.S. recorded one completion delivering 8,477 sqm. The largest Metro completion was Charter Hall’s 480 Swan Street in Burnley (32,000 sqm). 
• JLL is currently tracking 10 projects under construction in the CBD (252,100 sqm), with a further 21 in the Fringe (154,500 sqm) and 3 in the S.E.S. (58,100 sqm).

Elevated incentives continue to dampen rental growth

• CBD prime net effective rents (PNER) fell 2.3% over the quarter to now average AUD 335 per sqm per annum (-5.4% y-o-y). Fringe PNER fell 1.6% to now average AUD 308 per sqm per annum (-4.5% y-o-y), as the S.E.S fell a further 2.8% to now average AUD 248 per sqm per annum (-7.0% y-o-y). The decline was due to elevated incentives and softening occupier demand. 
• Prime CBD yields softened 25 bps on the upper end and 75 bps on the lower end to now range between 5.00%-7.00%. Prime Fringe yields softened 25 bps on the upper end and 62 bps on the lower end to now range between 5.75%-7.25%. S.E.S. prime yields softened 50 bps on both the upper and lower end to now range between 6.25%-7.25%. 

Outlook: Demand to be limited by weak pre-commitments

• The demand outlook for the Melbourne CBD is expected to be fragmented in 2023, with improvements in occupier demand predicted towards the end of 2024. However, the robust supply pipeline may limit short-term rental growth.
• In response to the softening in demand, JLL expects the CBD rental market to remain tenant-favourable as incentives will largely continue to climb to levels not seen since the early 1990s. Prime yields are likely nearing the end of the decompression cycle, with a recalibration in 2024 expected to determine new pricing levels across the office sector.