Although employment growth across the state over the past three years has been relatively modest, total employment in Victoria is at record high levels.

Over the next three years, tenant demand in the metropolitan office market is expected to be driven by growth in the health care, professional services and retail trade sectors.

• Given the metropolitan office development pipeline has been particularly constrained since 2010, a number of developers have recently launched speculative projects to capitalise on the improving tenant enquiry levels. New supply is projected to record its second highest annual level ever in 2015 with more than 40,000sqm being speculatively developed.
• In addition to the high levels of speculative development, new metropolitan office supply remains underpinned by government pre-commitments with new offices for the Australian Taxation Office (two buildings), South East Water and the Cardinia Shire Council all scheduled for completion in 2015.
• Beyond 2017, while there are a number of potential sites which have DA approval for metropolitan office developments, however increasingly these sites are being repositioned for residential development.
• Although metropolitan office vacancy levels have been sheltered by a number of buildings which have changed in use, typically to residential development, the trend of metropolitan office tenants migrating into the CBD will continue to impact the suburbs. Vacancy in the metropolitan office market is expected to rise above the long term average for next two years.
• Tenant demand trends over the past 12 months show that tenants are moving into better quality office space and closer to the CBD. Tenants that have recently moved closer to the CBD include: Forever New from Kew to Burnley, Office Max from Mulgrave to Richmond and Warranty Group from Doncaster to Hawthorn East.
• Metropolitan office rents have diverged between the inner and outer metropolitan office precincts. Looking ahead, the decreasing number of available prime vacant options in the City Fringe and Inner East is likely to lead to a reduction in incentives in those precincts.
• With prime investment opportunities becoming increasingly scarce in the CBD, the depth of appetite for metropolitan office assets is broadening as evidenced by the re-emergence of AREITs in the market last year.
• Although yields have compressed for metropolitan office assets, the existing yield spread between prime CBD and prime suburban offices suggests that yields are likely to continue to compress in the short term.

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