Sales activity in Melbourne’s metropolitan office market has surpassed $1.5 billion for the first time on record in 2021, almost triple the long-term annual average volume;

The vacancy rate of the Metropolitan office market has risen to 15-year highs having been adversely impacted by the wave of new supply and subdued tenant demand;

Although sales volume increased in the CBD office market, the vacancy rate remains elevated with its current rate at its highest level since the late 1990s.

Office Market Summary

Sales activity in Melbourne’s metropolitan office market has surpassed $1.5 billion for the first time on record in 2021, almost triple the long-term annual average volume. The elevated sales activity in the Melbourne metropolitan office market was driven by domestic institutions with five transactions having exceeded $100 million. Australian institutions accounted for more than 50% of the volume of Melbourne’s metropolitan office transacted over 2021 while offshore groups accounted for only 5% of all sales, their lowest share in a decade.

Melbourne Office Investment Activity

Sales Volume/Yields

Sales activity in Melbourne’s metropolitan office market has surpassed $1.5 billion for the first time on record in 2021, almost triple the long-term annual average volume. The elevated sales activity in the Melbourne metropolitan office market was driven by domestic institutions as they sought to expand their exposure to Melbourne’s metropolitan office market. Urban Property Australia analysis revealed that across the Melbourne metropolitan office market five transactions exceeded $100 million. Australian institutions accounted for more than 50% of the volume of Melbourne’s metropolitan office transacted over 2021 while offshore groups accounted for only 5% of all sales, their lowest share in a decade.

Despite potentially structural changes of working styles, yields compressed in the metropolitan office market as institutions become more active in the sector. Prime metropolitan office yields compressed to average 5.5% with secondary yields stable at 7.0%. While Urban Property expects investor interest for prime assets with solid income profiles to remain robust, the yield spread between secondary assets is likely to continue to widen as investors become more discerning.

Supply

Urban Property is currently tracking a 90,000sqm of new office projects currently under construction. Of all the total stock currently under construction in the metropolitan office market, 65% is already committed. The amount of uncommitted stock in the developments under construction is likely to put further upward pressure of the vacancy rate of the Melbourne metropolitan office market over the next two years. Looking ahead, UPA expects that new supply in the metropolitan office market has peaked for the medium term with tenants cautious to commit to new leases in the current environment.

Tenant Demand

With the Victorian economy the hardest hit hardest by the pandemic, Victoria’s total employment has only just surpassed pre-COVID levels having lost approximately 240,000 jobs at the height of the virus. Reflecting the employment growth of Victoria, the State’s unemployment rate has fallen to 4.2% as at December 2021, down from 7.3% as at June 2020. Highlighting the growing business investment environment, as at December 2021, there were 63,300 jobs being advertised compared with only 43,900 in December 2020. Mirroring the employment growth, tenant enquiries and leasing activity has also improved through the second half of 2021.

Total Office Vacancy by Market

Vacancy/Rents

Unfavourably impacted by the record levels of completions and subdued tenant demand, the vacancy rate of the Melbourne metropolitan office market increased to 12% as at July 2021, its highest level in 15 years. Urban Property forecast that the vacancy rate of the metropolitan office market will peak at the end of 2021 before stabilising in 2022 as the pipeline of new supply begins to dissipate.

Reflecting the elevated vacancy levels and modest leasing activity across the Melbourne metropolitan office market, prime rents have declined for the first time in five years. Metropolitan office rents have been affected by both a fall in net face rental levels and an increase in incentive levels. Looking ahead, Urban Property Australia forecasts that prime rents will continue to soften as tenants reassess their office requirements. Secondary office rents are projected to decline even more as occupiers seek to capitalise on better quality space which is being currently demonstrated from enquiries.

CBD, St Kilda Road & Southbank Office Markets

The total Melbourne CBD office vacancy has continued to increase through 2021 to 10.4% as at July 2021, its highest level in more than 20 years. The pandemic has also resulted in a surge of sub-lease space in the CBD with more than 400,000sqm anecdotally being currently being marketed, significantly higher than the “official” Property Council. The level of sub-lease vacancy is likely to remain elevated as businesses reconsider their office space needs with subdued business outlook and decisions to reduce staff numbers with the conclusion of the JobKeeper program. The impact of the pandemic has also resulted in prime CBD office net effective rents which have declined back to their lowest levels in three years. Urban Property Australia forecasts that prime CBD office net effective rents will stabilise in 2022 with many landlords having aggressively reduced asking rents to entice new tenants in CBD space.

Outside of the CBD, the vacancy rate of both the St Kilda Road and Southbank office markets rose as tenants contracted and relocated to other markets. As at July 2021, St Kilda Road’s office vacancy rate (16.3%) has risen to its highest rate since 2000 while Southbank’s office vacancy rate (15.2%) rose it is highest rate since 2005. Similar to the CBD, both the St Kilda Road and Southbank office markets recorded an increase in sub-lease vacancy. 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. Sales activity in both Southbank and St Kilda Road office markets was limited in 2021 with only two assets having transacted across both precincts in the year to date.

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