The Year Of The Landlord: Vacancies And Incentives Continue To Fall

Falling vacancies and lower incentives are promising a windfall for landlords across the country, according to the latest CBD Office research.

Colliers International’s CBD Office H1 research and forecast report projects that positive net-effective rent conditions from net face growth will continue to drive tenant demand throughout 2017, and an increase in investment volume is expected in 2017 as domestic and offshore building owners trade out of their profitable assets despite low numbers throughout 2016.

Colliers International Chief Executive for Victoria John Marasco said the landlord’s market is in full swing in Melbourne, with strong enquiry levels coming from business services, health and community services, IT and finance.

"This is resulting in a more positive environment than what has been experienced in the past few years," he said.

Colliers International Managing Director for office leasing Simon Hunt said Melbourne’s supply levels have been far less sporadic than cities like Sydney, and accompanied by stable absorption.

“We expect that healthy levels of demand will be sustained throughout the next two years, resulting in vacancy falling to 4.2 per cent by the end of 2018, before the next supply cycle kicks in in 2019.”

The report highlighted the increasing demand for suites across the country, with premium landlords carving up whole floors to cater to smaller tenants’ needs and boost effective rent values.

“We anticipate that a lack of whole floor space availability will see 2017’s leasing activity weighted to suites,” Mr Hunt said.

“It must be noted that while most grades across the CBD are seeing an increase in face-effective rents, the real story is in the sub-500 square metre B-grade market in fitted-out options.

“Landlords are taking advantage of this demand and building new fitouts in these smaller suites or refurbishing suites with existing fitouts.

“Flexible spaces and the activation of areas for work are rapidly rising and filling the needs of tenants looking for lease flexibility. Even though small businesses and start-ups have favoured flexible space, we should start to see larger businesses taking up more space in 2017, as the preference for flexible lease structures permeates through the market.”

Colliers International also pointed out that as Melbourne’s CBD grid rapidly becomes saturated with residential apartments, developers are honing in on strata office projects.

“Historically, residential capital values have outperformed those of commercial offices but we are beginning to see commercial office space become the more viable option due to the lack of supply and high demand,” Colliers International’s Chris Ling said.

“We’ve noticed local and offshore developers are gradually transitioning from a residential development strategy to focus on commercial office and mixed-use projects.”

Mr Ling said developers had started to realise the potential of strata office assets, which could be a more feasible investment option because of Melbourne’s saturation of residential apartments, paired with low build costs for new offices, which were the key catalysts for the shift.

Three key strata office project transactions since January 2015 include Collins Tower for a total of 1478 square metres ($9.8million), Aurora Melbourne Central for 3100 square metres ($20.2million to date), and 420 Spencer Street for 1156 square metres ($2.8million).