2023-10-05-莱坊-Melbourne_CBD_Office_Market_September_2023_10页_5mb

Melbourne CBD Office Market Summary - September 2023

Core Market Overview

The Melbourne CBD office market has experienced a slowdown, with net absorption remaining negative at -66,152 sqm in H1 2023, marking a significant decline from the previous year's positive absorption. This is the first negative figure for CBD office markets since H1 2021, indicating a prolonged period of weak demand. Vacancy rates have risen to 15.0%, the highest in 26 years, reflecting the market's struggle to absorb new supply and the impact of incentives increasing to 41.8%, which has pushed net effective rents down by -3.1% on a quarterly basis. Prime rents have also fallen by 3.1% q/q, while secondary rents have dropped by 2.6% y/y.

Economic Context

The Australian economy is slowing, with Q2 GDP growth at 0.4% (a 2.1% y/y decline from 2.4%). Despite this, the economy remains resilient, and the IMF forecasts growth of 1.6% in 2023 and 1.7% in 2024. The interest rate cycle appears to be nearing its peak, with rates held at 4.1% since June 2023. This has led to a stabilization in the capital markets and a reduction in yields, which are now at 5.7-6.0% for prime properties and 6.1-6.6% for secondary properties.

Market Dynamics

• Prime Grade Properties:

  • Total stock: 3,670,532 sqm
  • Vacancy rate: 14.2%
  • Net absorption: -48,724 sqm
  • Average net face rent: $699/sqm
  • Incentives: 41.8%
  • Effective rental growth: -1.0% y/y

• Secondary Grade Properties:

  • Total stock: 1,436,706 sqm
  • Vacancy rate: 17.0%
  • Net absorption: -17,428 sqm
  • Average net face rent: $547/sqm
  • Incentives: 39.1%
  • Effective rental growth: -2.6% y/y

• Total CBD Market:

  • Total stock: 5,107,238 sqm
  • Vacancy rate: 15.0%
  • Net absorption: -66,152 sqm
  • Net additions: -20,993 sqm

Vacancy Trends

Vacancy rates have continued to rise, especially in secondary grade properties, which now stand at 17.0%. Grade B buildings have seen a slight decrease in vacancy (from 22.0% to 20.4%), while Grade A vacancy has increased to 15.2%, surpassing the market average. Sub-lease vacancy has returned to 2%, with 103,445 sqm of space available, although this may underrepresent the true issue due to some unused space not being formally listed.

Development Pipeline

The development pipeline remains modest, with limited new supply expected over the next two years. Key projects include:

• 500 Bourke Street: 44,000 sqm, 70% committed, due in H2 2023
• 7 Melb Qtr Tower, 693 Collins Street: 68,000 sqm, 20% committed, due in H1 2024
• Southbank developments: Including 18-12 Riverside Quay, 555 Collins Street Stage-2, and Southgate (Tower 3), with some projects expected to be completed by 2026 or 2027

Southbank Update

Southbank has been particularly affected by the market downturn, with net absorption at -14,095 sqm in H1 2023. Vacancy rates have risen to 18.3%, higher than the CBD average. Prime space in Southbank has shown some resilience, with net absorption falling by only 4,451 sqm, but secondary space continues to face challenges. The Foster's Brewery building at 77 Southbank Boulevard was withdrawn, while Eleven Eastern on Eastern Road added new supply, contributing to higher vacancy.

Rental Market

• Face rents have remained relatively flat, with prime face rents at $699/sqm
• Effective rents have fallen, with prime effective rents at $410/sqm and secondary effective rents at $333/sqm
• Incentives have increased to 41.8%, putting downward pressure on effective rents

Investment Market

The investment market across Australia has been quiet, with only two office deals above $50m in H1 2023. These included:

• 7 Spencer Street (Melbourne): Sold to Daibiru, a Japanese real estate company, for $Conf. (price not disclosed)
• 99 Queen Street: Sold for $30m to a Chinese investor

Yields have moved out significantly, with prime yields at 5.7-6.0% and secondary yields at 6.1-6.6%. The bond market has shown some stability, with yields hovering just below 4%, indicating a potential bottoming out in the market.

Outlook

The market is expected to stabilize in the coming years, with moderate demand and limited supply. Prime yields are anticipated to recover over the next two years, while secondary yields may struggle due to uncertainty in tenant demand for lower-quality space. Net absorption is expected to edge down gradually, and effective rents may show slight improvement as confidence returns.

Contact Information

For more details or inquiries, contact the following experts:

• Research: Tony McGough (+61 3 9604 4608, Tony.McGough@au.knightfrank.com)
• Capital Markets: Trent Preece (+61 3 9604 4638, Trent.Preece@au.knightfrank.com)
• Office Leasing: Hamish Sutherland (+61 3 9604 4734, Hamish.Sutherland@au.knightfrank.com) and Simon Hale (+61 3 9604 4776, Simon.Hale@au.knightfrank.com)
• Asset Management: Ben Veale (+61 3 9604 4756, Ben.Veale@au.knightfrank.com)
• Valuations: Michael Schuh (+61 3 8548 6820, Michael.Schuh@vic.knightfrankval.com.au)