_Victoria’s investment market is seeing greater activity with investors

The Melbourne metropolitan office market – particularly for assets of sub $20 million – was dominated by owner occupiers in the first half of 2024, with investors shying away from the sector, spooked by high vacancy levels and weaker leasing demand. However, activity in the last quarter of 2024 saw increased demand from investors, especially private investors, as they started to see significant value in office assets and were buoyed by increased leasing sentiment.

This year we have seen continued demand for office investments, and assets with certain attributes are attracting more interest than others. Office buildings with a WALE of two to three years are more favourable as investors look towards the expected downturn in office supply, especially in the Fringe and Metropolitan office markets where effective rents do not support new development. Groups are looking forward and expecting modest rental growth and a decrease in incentives as the leasing market tightens. Knight Frank’s Australian Horizon 2025 report, which provides an outlook for the year ahead, found high office vacancy rates were obscuring the looming lack of new office supply, particularly at the top end of the market. A slowdown in new development is expected, despite ongoing demand for tenants to adapt and upgrade their workplace experience amid the ongoing flight to quality, which will lead to a tightening in space.

In the office investment space, there is significant demand for well-located buildings that offer access to public transport and amenities. Buildings on a Commercial 1 zone are viewed more favourably given the longer-term development potential of the site and the strong underlying land component which protects long-term value.

Investors looking to buy in Victoria’s investment market are taking a medium-term view rather than short-term, not only due to long-term development potential, which adds upside, but also because the tightening of the office market expected to play out over the next few years, with a shortage expected by 2027 or 2028. Knight Frank predicts the commercial property market to recover this year, with signs this is already taking place. Investors buying now, after values have adjusted down and are yet to begin the full recovery, will be well placed to see strong returns in years to come.

Buyer sentiment has significantly improved this year, with two rate cuts from the RBA giving investors greater confidence. Local and interstate buyers are active. We have seen several new intestate investors purchase metropolitan offices over the last 6 to 9 months as they see value in comparison to stronger markets such as Queensland and New South Wales, and we expect this to continue in the short to medium term. Offshore investor demand in Melbourne remains lower in comparison to other Eastern Seaboard markets, not only due to a weaker leasing market, but less favourable taxes placed on foreign investors in Victoria.
With further rate cuts expected this year, we anticipate the market will continue to build momentum in terms of volume and value.

For a discussion about the market and current opportunities, please contact me on tom.ryan@au.knightfank.com or 0419 786 244.