Melbourne's Office Market Boom Rolls On

Melbourne's office market boom is expected to roll on until at least 2024, with prime rents in the CBD expected to surge another 30 per cent to 40 per cent over the next five years.

According to research house BIS Oxford Economic the current record low CBD vacancy rate of 3.2 per cent is expected to trend up briefly, rising above 5 per cent in 2020, and then retreat back to 4 per cent, as take-up outpaces new supply in the following years.

The tightest CBD office market in Australia, Melbourne has seen a 16 per cent increase in prime office rents over the 12 months to the second quarter 2019.

The trend in Melbourne’s CBD prime rents has remained consistent to be up by 32 per cent in the past five year with forecasts of another surge in rents and values come on top of prime CBD office rents rising 45 per cent from the bottom of the market five years ago on the back of a strong Victorian economy.

The stronger leasing market combined with a wave of institutional capital seeking exposure to Australian commercial real estate has driven down average prime Melbourne CBD yields to 4.9 per cent compared with 6.3 per cent prior to the GFC.

The amount of office space in Melbourne's CBD is expected to increase by about 10 per cent by 2020.

However, a report released by Urbis revealed if supply is not dramatically increased in the next 20 years, it could end up costing the Victorian economy $7 billion in lost jobs due to a lack of options for new workers.

A tight office market is not great for a company looking for more space, but, as the Property Council of Australia says, it is a solid indication of a strong economy.

According to Savills latest Impacts report, Melbourne CBD recorded the greatest yield compression globally across the past three years for CBD office markets.

Taking in the level of yield compression across key global CBD markets, Melbourne led with rental yields falling 174 basis points since 2015.

However, analysts hold firm that the balance of power can turn. Office markets do cycle changing with the economy, with technology, and of course with supply, and enthusiasm for the sector will not remain open ended.

Prominent corner office building listed

Investors and developers have been spurred on by the strong market fundamentals with vacancy is at near record lows, incentives falling, rents spiking, and, on the back of falling interest rates, values are soaring.

Landmark development sites in prime locations across Melbourne are being readied for sale as owners seek capital from forward funding partners looking for a slice of tightly-held CBD markets.

The latest to hit the market is China Southern Airlines Australian headquarters with price expectations of $50 million.

Investor Feng Sheng has decided to offload the the 11-level office building, located at 342-348 Flinders Street, after he bought through his Asia Pacific Hotels group in 2003 for $7.8 million.

CBRE’s Melbourne Middle Markets team of Josh Rutman, Lewis Tong and Mark Wizel are managing the sale of the CBD property which holds views of the Yarra River and Southbank.

The property sits directly opposite the Flinders Street Train Station and banana vaults, which have been slated by the state government for major redevelopment — which could result in major activation to the surrounding precinct.

Tong noted that lack of investment stock on the market and the strength of the Melbourne office sector would be key buyer draw cards.

“The Melbourne office market is showing some of the strongest fundamentals since 2007, this provides an opportunity for investors to hold or add value and enhance a building’s current improvements – alternatively, investors could explore the option of a full site redevelopment.”

Only three properties have come to market in the $40 million to $100 million price range during 2019, whereas six assets in this price bracket were transacted during the same time-period in 2018.

“Given the significant investor appetite for Melbourne office assets and the building’s prime corner position, we expect the sale campaign to generate considerable investor interest,” Rutman said