_Vacancy rate in Melbourne at a five-year low with office supply under pressure
The Melbourne CBD is entering a relatively low period of new office development with total new supply during 2017 expected to be at its lowest level in 15 years.
There are currently ten developments totalling 360,242 sq m under construction in the Melbourne CBD which are anticipated to be completed by 2020.
However, the supply pipeline is limited over the next two years, with just 113,242 sq m currently under construction, all of which will come online in 2018.
As a result, new supply added to the market in 2017 and 2018 will average 1.3% of total office stock, compared to the long-term average of 3.6%.
Melbourne CBD currently has the second lowest vacancy rate across all the Australian CBD office markets, at 6.5%. With the absence of any major office developments until mid-2018, the overall vacancy rate is expected to continue to decrease over the next 12 months, potentially falling to 4.1% by the end of 2018.
Off the back of strong population and jobs growth, coupled with positive tenant demand and falling vacancy levels, average prime net effective rents grew at their strongest rate in seven years, increasing by 8.0% to $402 per sq m in the 12 months to July 2017 - an all-time high.
While average incentive levels have fallen modestly, effective growth has been underpinned by net face rents increasing by 5.8% to $550.
Over the past decade, new supply has averaged at 119,198 sq m per annum in the Melbourne CBD. This increase has largely been driven by the evolution of the Docklands precinct, Australia’s largest urban renewal project, adding approximately 905,000 sq m of office stock over the past ten years.
Since the first office building completed in 2005, Docklands has provided a supply alternative to the market, drawing in numerous large corporates such as NAB, ANZ and KPMG, who were attracted to the campus-style buildings with large floor plates and discounted rental levels compared to the CBD core.
The total office component in the Docklands precinct is reaching completion, with the final four office schemes 664 Collins Street, One Melbourne Quarter, Tower 5 at Collins Square and 839 Collins Street currently under construction, adding a further 131,442 sq m to the office stock by the end of 2019. As a result, Docklands will become the second largest office market precinct within the Melbourne CBD.
Looking ahead, the supply cycle for the Melbourne CBD as a whole is set to increase materially from mid-2019, with five developments in the Flagstaff, Eastern Core and Western Core precincts under construction totalling 247,200 sq m.
Between 2019 and 2021, new supply will average 8.6% of total office stock, well above the long-term average. On a global basis, with Melbourne ranked in the top five cities for forecast rental growth performance over the next three years, the Melbourne CBD will continue to be a focal point for global occupiers and investment capital going forward.
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