• Investment activity in Melbourne’s office remains subdued in 2024 to date with around $900 million of sales with CBD offices accounting for 76% of the sales volume;
• While the level of tenant demand improved, it remains relatively soft with the vacancy rate of the Melbourne metropolitan office almost double the long-term average;
• The total Melbourne CBD office vacancy has continued to rise, increasing to 18.0% as at July 2024, its highest level since January 1997 with the vacancy rates of Southbank and the St Kilda office markets above average.

Office Market Summary

While Victoria’s total employment has increased by 151,000 over the year, the state’s unemployment rate rose to 4.4% as at September 2024, up from 3.5% a year earlier. Despite Victoria’s employment base increasing, tenant enquiry for office space is modest, as tenants are increasingly more cautious with economic conditions mixed. Similar to occupiers, investors also remain cautious with sales activity across the Melbourne office market on track for its lowest annual level of sales in 20 years. Reflecting the soft tenant demand environment, rents remain under downward pressure as landlords compete for limited opportunities.

Sales Volume/Yields

Investment activity in Melbourne’s office remains subdued in 2024 to date with around $900 million of sales transacted in the year so far. Based on the volume of sales recorded in 2024 to date, 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 located in the CBD which accounted for 76% of sales this year. Outside of the CBD, all other sales were located in the Metropolitan market with six offices sold above $10 million. Reflecting the cautious investor environment on the state of the CBD office leasing market, the CBD is set to record 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 95,000sqm 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, 41% is already committed. Much of the focus of the new development remains focused on the City Fringe with the precinct accounting for 45% of all new metropolitan office stock projected to be completed in the next 18 months. 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 September 2024, Victoria’s total employment has increased by 151,000, above the growth of 144,000 recorded 12 months ago, however the state’s unemployment rate rose to 4.4% as at September 2024, up from 3.5% as at September 2023. A similar trend was observed in the job market with 53,700 jobs advertised in Victoria as at September 2024, down from 68,500 a year earlier, albeit current levels remains above the 10-year average of 48,000. Tenant enquiry remains mixed, however with leasing activity shallow. While employment growth has been solid over the past year, office occupancy levels remain significantly below 2020 levels, however levels have also recovered as working patterns become more settled. 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 remains relatively soft against historical levels leading to the vacancy rate of the Melbourne metropolitan office market falling slightly, tightening to 12.7% as at July 2024, still almost double the long-term average, although it 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. Although the vacancy rate has stabilised, as tenants have increasingly become more cautious, prime rents face downward pressure as tenants explore alternative markets. Looking ahead, Urban Property Australia forecasts that prime rents have stabilised for the short term with tenant demand subdued. 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 18.0% as at July 2024, its highest level since January 1997. While the headline sub-lease vacancy rate fell in the six months of July 2024 to 85,000 square metres across the CBD, Urban Property Australia is currently tracking an additional 40,000 square metres also being offered for sub-lease, almost three times the long-term average. Tenant demand in the CBD office market over the first half of 2024 was negative, with most occupation levels of most grades contracting, with the exception of Premium-grade office stock. As a result of the tenant vacations, the A-grade office vacancy rate in the CBD has increased to 18% – 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 relatively modest with $750 million of office sales recorded, well below the long-term average of $2 billion.

Total Office Vacancy by Market_Q2_2024

Outside of the CBD, the vacancy rate of the St Kilda Road office market fell marginally in the six months to July 2024, easing to 27.4%. Elsewhere the vacancy rate of the Southbank office market increased to 18.6% as at July 2024, its highest level since 1995. Although the vacancy rates of both the St Kilda Road and Southbank’s office markets are elevated; Urban Property Australia anticipates the completion of the Anzac railway station in next year 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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