The Melbourne CBD office market is 18 months into a leasing market recovery and a record number of leasing enquires have been recorded since the start of 2015. Vacancy is back into single figures at 9.6% for both prime and secondary space, while Melbourne recorded its fourth consecutive quarter of positive net absorption in 1Q15.

However, while face rents have been rising steadily for over the last three quarters, incentives stubbornly remain at levels averaging 32% on a 10 year lease and the market is still skewed towards the tenant.

There are a number of industry sectors driving activity – the most active are the professional and financial services sectors. Victoria is recording strong population growth, while the RBA has eased monetary policy to an all-time record low, stimulating new investment in the residential sector. Residential investment activity has a positive impact on employment growth in the transaction based industries; bankers, accountants, lawyers and real estate agents. The IT sector is also expanding and at a faster rate than other sectors as their clients seek to become more innovative with technology to boost productivity.

Our analysis of leasing enquiry shows that 60% is for space less than 1,000 sqm which suggests organic growth in the small business sector is starting to drive economic recovery and this coupled with continued centralisation is driving leasing enquiry.

Centralisation has been a characteristic of the Melbourne CBD office market over the past seven years and is a trend that we expect to continue while incentives are at elevated levels. We have tracked in excess of 185,000 sqm of space leased (>1,000 sqm) in the CBD market as a direct result of centralisation since 2008.

The request for “funky….boutique space” is common and not just from technology companies. More than 68% of tenants seeking <500 sqm and 50% of those seeking 500-1,000 sqm are looking for already fitted space.

As a result some landlords are opting to speculatively refurbish floors resulting in shorter letting up periods than those observed for cleared space. A number of trends are emerging:

• Exposed ceilings creating a feeling of height and space
• Provision of end of trip facilities
• Polished concrete floors
• Striking furniture

The challenge is to do this economically as some architecturally designed fit-outs are more expensive than traditional fit-outs and tenants still require additional incentives above the contribution to fit-out.

Lead indicators for the Melbourne CBD office sector are improving. Victoria is leading Australia’s economic recovery with the annual growth rate in state final demand plus net exports up 3.3% for the March quarter. However, while there are improvements in the job advertisement surveys, business confidence is still well below the long term average. Softer business confidence is a sign that business remains uncertain about the short to medium-term outlook and landlords will need to remain proactive to attract and retain tenants.

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