The centralisation trend in Melbourne is set to continue in 2014

April 21, 2014 / By  

Average incentives in Melbourne CBD office markets continued to increase this quarter, albeit fractionally, to an average of 37 months free (assumed 10 year lease term). Coupled with stagnant effective rents and high vacancy, the CBD is presenting an ever attractive value proposition for businesses hoping to upgrade their current tenancies. Amid a skyline increasingly populated by high rise residential apartments and government commitment to infrastructure improvements, the trend of traditionally non-CBD tenants centralising their operations has continued. Since 2008 we have seen 47 major tenant moves (>1,000 sqm) by occupiers moving into the CBD from decentralised markets.

Historically the amenity of the CBD office market has come at an average premium of 25% extra gross effective rent when compared with the Fringe and Suburban markets. The Fringe market consists of approximately 1.6 million sqm in a concentrated ring surrounding the core CBD market, while the Suburban market consists of 1.3 million sqm of space spread throughout the South Eastern Suburbs of Melbourne. While the Suburban market has been able to maintain its discount through lower average face rents, the Fringe has increasingly relied on larger incentives to retain Fringe tenants. Presently incentives in the Fringe market are at an average of 32 months free and average outgoings have grown 40% over the previous decade. When considering net effective rents current conditions reflect Fringe assets earning 19.4% less than their Suburban counterparts. If this eroded profitability continues Fringe landlords may find themselves in increasingly difficult bargaining positions when seeking to secure tenants.

Recent large tenant moves from the Fringe to buildings in the CBD currently subject to refurbishment works suggest that centralisation is a compelling value proposition for more than just the rental metrics. Australia Post has recently signed a lease for 10,000 sqm of space in 180 Lonsdale Street and Cardno has signed to 4,700 sqm of space to 501 Swanston, both buildings are undergoing extensive refurbishments. These deals would have been impossible to make in the Fringe with a significant lack of prime contiguous space currently available in the market; just one building has over 4,700 sqm of space available. The development pipeline in the Fringe is also very tight with only 12,100 sqm of space under construction, of which 48% is pre-committed. Quality space still leases well amid the current weakness in demand but it is simply not available in the Fringe at the moment and in light of the current demand pipeline is unlikely to change.

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