Melbourne CBD records highest office vacancy rate since 1998

The headline vacancy rose to 15.4% in Q4 2022.

According to a JLL report, the Melbourne CBD recorded negative net absorption of about -18,600 sqm. Weak leasing demand was driven by tenant activity within the sub-1,000 sqm cohort of the market. 

CBD headline vacancy increased to 15.4%, the highest CBD vacancy figure since 1998. 

Here’s more from JLL:

The Melbourne Fringe submarket recorded moderate leasing demand of about 7,500 sqm over 4Q22, while the S.E.S recorded a solid quarterly result of about 16,800 sqm. Demand was largely driven by relocation activity from untracked markets as well as expansion activity. Headline vacancy tightened to 14.4% in the Fringe and 11.9% in the S.E.S.

Supply pipeline remains strong in the CBD and Fringe submarkets

One project completion was recorded in the CBD, with the refurbishment of 637 Flinders Street delivering 25,112 sqm back into the CBD market. The asset had no pre-commitments secured as at practical completion. There were no completions in the Fringe market, as the S.E.S delivered one project at 160 Whitehorse Road (2,000 sqm). 

JLL is tracking 10 projects currently under construction (249,450 sqm) in the CBD, with a further 17 (208,100 sqm) in the Fringe and three (46,800 sqm) in the S.E.S. Lendlease’s 69,500-sqm development at Melbourne Quarter in the CBD remains the largest project under construction throughout Melbourne’s office market.

Effective rents remain steady as incentives increase in the CBD

CBD prime net effective rents (PNER) marginally fell -0.3% over 4Q22, although remaining broadly unchanged over the past year at AUD 354 per sqm per annum (0.1% y-o-y). Fringe PNER remained robust (0.2% q-o-q) at AUD 323 per sqm per annum, with a strong annual growth result of 4.0%. PNER in the S.E.S remained steady over the quarter (-0.2% q-o-q) at AUD 266 per sqm per annum (-0.5% y-o-y).

Prime CBD yields softened 50 bps over the quarter on the lower end to range between 4.25%-5.75%. Prime Fringe yields softened 12.5 bps on the upper end to range between 4.88%-5.50% as S.E.S prime yields softened 25 bps on the lower end to range between 5.00%-6.00%. 

Outlook: Vacancy across Melbourne’s submarkets to increase in 2023

Global economic uncertainty heading into 2023 is likely to dampen leasing activity as businesses take a cautious approach to leasing decisions. The headline vacancy rates across all three of Melbourne’s office submarkets are likely to trend upwards, driven by a substantial development pipeline (particularly in the CBD and Fringe).

Prime net effective rental growth is projected to record an uplift in 2023. This is being driven by a stabilisation in incentives which are projected to remain elevated over the short term as a result of the higher vacancy rate. Prime yields are forecast to continue softening, as investor markets remain challenged by an elevated cost of debt and economic pressures.

Note: Melbourne Office refers to Melbourne's CBD office market (all grades).