Melbourne Suburban Office Market

Highlights

The vacancy rate has increased to around 7.5%, which is a six year high. This is mainly attributed to new supply (second highest level in 15 years), and associated backfill space vacated, particularly in the Outer East (12.70%) and South East (11.20%). Other factors; tenant consolidations and relocations.
Around 90,400m2 of new office space was completed in 2015 (second highest level on record). This is underpinned by the Australian Taxation Office (Box Hill), South-East Water (Frankston), Monash University (Mulgrave) and Cardinia Shire Council. Positive net absorption was around 51,300m2 of new office space.
Rental growth is expected to be above CPI, at around 3.0% p.a. and remain relatively subdued in the short-term. continue to remain generous, due to the strong competition to secure quality tenants and to attract new tenants and retain existing tenants (average incentive levels range from 10% - 25%).
Interestingly, speculative development has returned, with 16,000m2 constructed at Caribbean Park, Scorseby and 5,800m2 at Nexus Court, Mulgrave. The strategy is to capitalise on improved tenant enquiry levels.

New supply is forecast to remain below average over the next three years, with around 41,400m2 of new office due for completion in 2016 (predominately in the South East).
Business confidence will need to improve, to generate a sustained increase in leasing activity (subject to stronger economic growth). Tenant demand should remain stable into late-2016, given the high pre-commitment levels of new supply.
Incentives should remain relatively high at an average of 10% - 25%.
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.
Continued pressure on rents (taking into consideration incentives) will remain over the next 6+ months, as a landlord’s contribution to fit-outs is generally required to secure a tenant in a new building.
The Victorian Budget Growth Estimate is expected to be around 3.00% in 2016-17 (2.90% est. in 2015-16, 2.50% growth in 2014-15). A reduction in incentives to more moderate average levels is expected with increased tenant demand (possibly in mid 2017, subject to stronger sustainable economic growth).