Melbourne Suburban Office Market Snapshot - Q1/19 Update     

 

 

   Sentiment - Record low vacancy rates, increased rents, shortage of quality office properties.

 

   Valuation - Improving for well let quality A-Grade properties. Remain cautious of weaker secondary market

 

 

  Highlights

 

  • The vacancy rate is currently around 5.60%. There is strong demand for City Fringe, with very limited opportunities available,  (vacancy rate at 15 year low of 2.5%), and Inner East office markets at around 4.0% (from 6.3% 12 months ago ). This is mainly attributed to upgrades, consolidation and increased efficiency and flexibility. Vacancy rates have also reduced for the Outer East at 7.60% and South East (8.80%). Other factors include relocations, better quality premises to attract and retain staff.

 

  • Rental incentives have reduced (average incentive now 10% - 15% for a 5 new year lease), with the recent increased demand for office space. There is strong competition to secure quality tenants and to attract new tenants and retain existing tenants.

  • Interestingly, further speculative development is occurring in Richmond, Cremorne and Collingwood. The strategy is to capitalise on improved tenant enquiry levels for high quality inner-city office premises (Rents from $440.0 sq. metre net).

 

  • The continued low interest rate environment is likely to remain for the foreseeable future. This is beneficial for tenants, together with owner-occupiers and the investment market.

 

  Future Outlook

 

  • Suburban office sales are expected to remain fairly strong in early 2019 (high level of investment sales in 2018 above $10.0m). Yields in the prime market average 6.25% - 7.25%, whilst secondary yields are around 7.50% - 9.00%.

 

  • Business confidence has improved and generated a sustained increase in leasing activity over the past 6 months. Tenant demand should remain firm into late-2019 given the high pre-commitment levels of new supply. Incentives may reduce further in late 2019, given reduced vacancy rates and limited leasing opportunities available.

 

  • The trend is expected to continue, whereby tenants are upgrading into better quality buildings, with improved efficiency and updated environmental considerations incorporating the latest economic sustainable development principals (ESD). The catalyst is primarily tenant upgrades, expansion and consolidation.

 

 

  •  Strong rental growth expected, with the limited number of leasing opportunities available over the next 6 months.

  • There is an increase in owner-occupiers returning to the market by purchasing a suburban office property as an alternative to leasing, particularly in a low interest rate environment. This is mostly applicable to smaller office premises under 300 sq. metres. The key focus is on cost management and controlling your own destiny. SMSF's are also active in the office market.