Melbourne CBD office leasing activity lowest in a decade but demand for space will prevent vacancy 'blowout': Savills

Office leasing activity in the Melbourne CBD is at lowest level in a decade, but the current vacancy rate of 6.2% is not expected to blow out, with accountants KPMG and law firm Corrs Chambers Westgarth among those seeking around 150,000 square metres of office space.

Savills recorded 190,487 square metres of space leased over the 12 months to September 2012 in central Melbourne (CBD, St Kilda Road, Southbank and Docklands) from leases greater than 1,000 square metres.

This is down 56% on the previous corresponding 12-month period and down on the five-year average of 438,495 square metres.

The hardest hit was the high-end premium office market, which experienced a total negative net absorption of 12,336 square metres for the year compared with grade A, which enjoyed a positive net absorption of 7,760 square metres and secondary grade office stock, which recorded a positive net absorption of 8,619 square metres.

This resulted an overall positive net absorption of 4,043 square metres - net absorption refers to the amount of space occupied at the end of a period of time minus the amount occupied at the beginning of that period, takes into consideration space vacated during the period.

The following graph prepared by Savills shows that the lowest vacancy rate remains for A-grade office stock (4.7% down from 5% ) while the vacancy rate for the most expensive premium grade stock has risen from 5.4% to 7.7%.

Despite the subdued leasing activity, significant tenancy requirements remain in the market, according to Savills.

Savills head of office leasing for Victoria Nicholas Farley says it is premature to talk about a vacancy rate blowout and predictions of a significant fall in rental levels when there is a good level of tenancy requirement and enquiry levels are trending upward.

"Public requirement for CBD office space is currently well above 150,000 square metres, including Corrs Chambers Westgarth (9,000 square metres), KPMG (25,000 to 30,000 square metres), and several other well-known tenants in the market for circa 6,000-square-metre requirements.”

"Add to that the fact that enquiry from the finance and insurance sector is well above its historical average, the property and business sector has its highest enquiry level for 10 years, and while the IT and technology sector has recorded an about average requirement, in terms of what its requirements have been over the last decade, it is now trending up."

The biggest leasing deal over the year to September was Suncorp leasing 15,500 square metres of space at 530 Collins Street, Melbourne’s largest premium office building, which is owned by the GPT Wholesale Office Fund.

Net effective rents now typically ranged from $340 to $437 per square metre per annum for A-grade quality stock, and between $205 to $287 per square metre per annum for secondary-grade buildings.

Net rents for premium grade range from $440 to $675 per square metre.

According to Savills,the Melbourne CBD office market contains 3,581,940 square metres of lettable space.

Of this, over half at 2,034,886 square metres is of prime (premium and A grade) quality, 849,431 square metres is grade-B quality and the balance (697,623 square metres) grade C and grade D.

Savills also notes that foreign investors continue to be attracted to Melbourne  office investments due to a range of newly built buildings  with long leases to quality tenants and the comparable stability of the region’s economic environment.

In the last six months the most significant transactions in central Melbourne were 525 Flinders Street ($54 million, purchased by AFIAA), 501 Swanston Street ($60 million, purchased by PDG) and 150 Collins Street currently under construction ($180 million, purchased by GPT).