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CBD tenant migration limited by tight vacancy

Property Markets / Outlook

Australia

Jan 31 2018

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Tight vacancy stalled office tenant migration to the Melbourne CBD throughout 2017, with Savills Australia predicting an ongoing landlords’ market for the next two years.

The government and community sectors are fueling office leasing activity, accounting for 32 per cent of the 387,097sqm of space leased in the 12 months to December 2017.

Savills latest research reveals that although total leasing activity was down by 24 per cent on the 2016 year-end results, the numbers were 15 per cent higher than the 10-year average of 328,477sqm.

Savills Melbourne’s associate director for Research & Consultancy, Monica Mondkar, said the result wasn’t “shocking” due to the lower availability of space for tenant relocation.

“As vacancy levels continue to tighten further over the next two years, we can expect this trend of lower take-up levels to continue until new supply comes online by the end of 2018-19,” she said.

The findings come as the Property Council of Australia (PCA) is set to release its 2018 Office Market Report on Thursday.

The government and community sectors were the dominant players in Melbourne’s office leasing market in the past year, committing to 123,863sqm of the total 387,097sqm of stock leased, with the finance and insurance sectors close behind on 100,645sqm (26 per cent), and property and business services following on 89,032 (23 per cent).

“The CBD office market has traditionally been home to a wide range of occupiers, from finance and insurance, to property, business and IT and communication – however, tenant demand from the government and community sectors throughout the past two years has seen robust growth, along with the rise in the sub-sector of education,” Ms Mondkar said.

“Melbourne’s CBD is popular among office sector tenants as it attracts students and a white-collar workforce from across the region, and is supported by its nation-leading public transport network, food and wine culture and entertainment options, which are a huge drawcard for students and millennial workers alike.”

Education absorbed 78,675sqm of Melbourne CBD office space in the past 12 months, up from the 28,589sqm leased by year-end 2016 and a 175 per cent jump from year-end 2015.

“Melbourne is Australia’s education capital, with seven Australian universities and the campuses of five others in a central Melbourne location, the CBD and city fringe,” Ms Mondkar said.

“Melbourne’s status as the world’s most livable city, title of Australia’s leading tech city, and relatively affordable cost of living compared to Sydney has been evoking interest from hordes of international students.

“This unabated office demand from the education sector is expected to continue on the back of the strongest population growth in the nation and a major focus on increased employment opportunities.”

Savills Victorian state director for Office Leasing, Mark Rasmussen, highlighted key direct leases signed in 2017 from tenants in the education sector, including Cambridge International, Monash College, Monash University and Melbourne University, as well as the co-working sector, with WeWork and Rocket Coworking both expanding their footprints in the CBD. 

“Already there are several co-working spaces in Melbourne and this trend will continue to grow among like-minded, freelance workers, offering flexible work spaces for new businesses without any long-term lock-in contracts,” he said.

Mr Rasmussen said that net face rents for Melbourne’s CBD typically ranged from $520 to $640 per sqm per annum for A-grade buildings, and between $455 and $480 per sqm per annum for B-grade stock, reflecting a rental growth of about 10.5 per cent and 23 per cent per annum respectively for both classes of stock. 

“Vacancy rates are expected to continue to tighten into 2018, reducing the number of options and incentives for tenants,” he said.

“The effective rental growth, which has had a double-digit rise over the previous year, will continue its upward trajectory until the new supply comes online between 2019 and 2020.”

Pursuant of this, according to the Australian Bureau of Statistics, Victoria’s economy grew by 4.25 per cent in the 12 months to September 2017, ahead of the other states.

“This figure is expected to grow at 3.9 per cent in 2018, well above the national average (3.1 per cent), and we expect this economic trend to continue, with business optimism supporting growth in tenant demand, and subsequently boosting net effective rents, in the near term,” Mr Rasmussen said.

Ms Mondkar said that while the 2016 figures were largely driven by strong tenant pre-commitments to new projects and major lease renewals, the 2017 figures were underpinned by direct leases. 

“Direct leasing activity was at a record high, totalling 247,311sqm and accounting for 64 per cent of the total leasing activity in the CBD throughout the past year,” she said.

 

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