• Following decade-low transactional volumes recorded last year, investment activity in Melbourne’s office remains subdued in 2024 to date with only $145 million of sales transacted in the first quarter;
• While the level of tenant demand improved, the vacancy rate of the Melbourne metropolitan office market rose slightly, although remains the lowest vacancy rate of all Melbourne’s office markets;
• The Melbourne CBD office vacancy has continued to rise, while the vacancy rate of the St Kilda Road office market rose to 27.5% as at January 2024, an all-time high.

Office Market Summary

Following decade-low transactional volumes recorded last year, investment activity in Melbourne’s office remains subdued in 2024 to date with only $145 million of sales transacted in the first quarter. Based on the volume of sales recorded in the first quarter, the Melbourne office market is on track for its lowest annual level of sales in 20 years. While the vacancy rate of the Melbourne metropolitan office market rose slightly, it remains the lowest vacancy rate of all Melbourne’s office markets. In contrast, the Melbourne CBD office vacancy has continued to rise, increasing its highest level since 1997 with the vacancy rate of the St Kilda Road sitting at all-time highs.

Sales Volume/Yields

Following decade-low transactional volumes recorded last year, investment activity in Melbourne’s office remains subdued in 2024 to date with only $145 million of sales transacted in the first quarter. Based on the volume of sales recorded in the first quarter, the Melbourne office market is on track for its lowest annual level of sales in 20 years. The vast majority of sales recorded in 2024 to date were outside of the CBD and in the Metropolitan market with three offices sold above $10 million, accounting for 60% of all of Melbourne’s office transactional volume. Reflecting the cautious investor environment on the state of the CBD office market, only $56 million of CBD office stock has been transacted in 2024 to date and similar to the broader market may be set for the lowest volume of sales in 20 years. Given the limited sales volume and continuing uncertainty on the sector, average prime metropolitan office yields remained stable at 7.25% with secondary yields averaging 8.75%.

Melbourne Office Investment Activity

Supply

Urban Property is currently tracking 160,000sqm of new office projects currently under construction in the metropolitan office market. Of all the total stock currently under construction in the metropolitan office market, 42% is already committed. Much of the focus of the new development remains focused on the City Fringe with the precinct accounting for 51% of all new metropolitan office stock projected to be completed in 2024 and 2025. With tenant demand strengthening and the level of new supply peaking in the Melbourne metropolitan office market in the short term, Urban Property projects that the vacancy rate has peaked and will trend down as tenants capitalise on the attractive leasing terms on offer to upgrade their office accommodation. Although the vacancy rate is anticipated to have peaked, with vacancy levels still elevated; looking ahead, the development pipeline is forecast to slow as funding requirements for new projects will constrain new supply for the medium term.

Tenant Demand

Over the year to March 2024, Victoria’s total employment has increased by 82,000, the lowest growth since 2021 with the state’s unemployment rate rising to 4.1% as at March 2024, up from 3.7% as at March 2023. A similar trend was observed in the job market with 58,600 jobs advertised in Victoria as at March 2024, down from 72,400 a year earlier, albeit current levels remains above the 10-year average of 47,000. Tenant enquiry remains fickle, however and leasing activity appears to be improving. While employment growth has been solid over the past year, office occupancy levels remain significantly below pre-COVID levels, albeit pleasingly levels have also recovered in the past six months. While tenant demand has been positive over the past 12 months, take up of stock remains subdued with occupiers focused on A-grade space.

Vacancy/Rents

While the level of tenant demand improved, it was surpassed by the level of new completions and as such the vacancy rate of the Melbourne metropolitan office market rose slightly, increasing to 13% as at January 2024, still almost double the long-term average, although remains the lowest vacancy rate of all Melbourne’s office markets. Urban Property forecast that the vacancy rate of the metropolitan office market has peaked for the short term as the pipeline of new supply reduces in coming years. Reflecting the stabilising vacancy levels and improving leasing activity across the Melbourne metropolitan office market, prime rents continue to rise with both growth in net face rental levels while incentive levels stabilise. Looking ahead, Urban Property Australia forecasts that prime rents will modestly rise as tenant demand gathers momentum. In contrast, secondary office rents are projected to decline even more as occupiers seek to capitalise on better quality space which is highlighted from the recent trend of tenant moves.

CBD, St Kilda Road & Southbank Office Markets

The total Melbourne CBD office vacancy has continued to rise, increasing to 16.4% as at January 2024, its highest level since July 1997. As occupiers continue to re-assess their CBD office requirements, sub-lease vacancy levels rose through 2023 with now more than 100,000 square metres across the CBD offered for sub-lease with Urban Property Australia projecting further rises in 2024. Tenant demand in the CBD office market over the second half of 2023 was negative, with most occupation levels of most grades contracting, surprisingly led by A-grade office stock. As a result of the tenant vacations, the A-grade office vacancy rate in the CBD has increased to 17.3% – its highest level since 1995. Net effective rents for Melbourne CBD office stock have declined as incentives has risen in response to increasing vacancy rates and subdued tenant demand. Constrained by limited purchaser sentiment and the elevated vacancy rate, sales activity in the CBD recorded in 2024 to date remains modest with only $56 million of office sales recorded.

Total Office Vacancy By Market

Outside of the CBD, the vacancy rate of the St Kilda Road office market rose to 27.5% as at January 2024, an all-time high. Elsewhere the vacancy rate of the Southbank office market fell to 17.0% as at January 2024, however remains almost double its 10-year average of 10%. Although the vacancy rates of both the St Kilda Road and Southbank’s office markets are elevated; Urban Property Australia anticipates the addition the Anzac railway station in 2025 and the rejuvenation project of Southbank Boulevard will stimulate tenant demand for both markets in the medium term. Similar to Melbourne’s other office markets, transactional activity remains subdued in both Southbank and St Kilda Road office markets with no offices sold for more than $10 million across the two office markets in 2024 to date.

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