Weak local economy to push suburban Melbourne office vacancy rate to 10.6% by December 2013: BIS Shrapnel

BIS Shrapnel is forecasting the metropolitan Melbourne office market to weaken significantly over the next 12 months, with the vacancy rate reaching 10.6% by the end of 2013.

It forecasts a metropolitan-wide negative net absorption rate of around 130,000 square metres over 2012-13, the worst annual rate of net absorption in the post-GFC period and worse than in the 2002–2003 slowdown.

Net office absorption is the amount of space leased minus the amount of space vacated over a given time frame.

The metropolitan office market incorporates the city fringe (Port Melbourne, Richmond, Collingwood and East Melbourne) and suburban office markets extending in a 20-kilometre radius around the city.

In its first half of 2012 report, Colliers calculated the Melbourne metropolitan office vacancy rate at 6.2%, with the highest vacancy rate of 7.7% in the outer east (Box Hill, Mt Waverley, Mulgrave and Burwood) and the lowest in the city fringe (5.5%)

According to BIS Shrapnel, the implications for landlords and tenants are clear, with an “extremely tough two years” ahead for the Melbourne office market.

“It’s already a tenant’s market and conditions for tenants will become even brighter over the next two years," says Maria Lee, senior project manager at BIS Shrapnel and author of the Melbourne Commercial Property Prospects 2012 to 2022.

“Tenants will be well placed to delay leasing negotiations to take advantage of greater leasing incentives and lower rents. Meanwhile, landlords should focus on leasing strategy to preserve cashflows and property values through the downturn.”

The report notes that the CBD and Docklands will be somewhat insulated by the fact that several tenants are centralising from the suburbs. BIS Shrapnel forecasts negative net absorption of 50,000 square metres over 2012–13 before the market turns  positive in the following year.

According to Lee, there is a common misconception that the current softness in Melbourne’s office leasing market is due to nationwide lack of business confidence and slow growth outside the mining sector with the expectation that Melbourne will return to business as usual once this is over.

However, she says local conditions are the bigger problem.

According to Lee, the weakness in the Victorian economy will dramatically impact office-based employment in Melbourne over the next two years.

Victoria weak economy is the result of a number of different factors.

BIS Shrapnel expect dwelling building activity to decline over the next two years, compounding the existing weakness in the building industry, which is under pressure from falling non-dwelling building.

The research firm also expects the high Australian dollar is taking its toll on manufacturing, tourism and education services, as well as on the financial services sector which is looking to offshore operations.

And it says that significant cuts to public spending have only just begun, and will get deeper over the next two or three years, providing a significant and prolonged drag on the economy.

“The stand-alone office workforce is expected to be hit particularly hard; indeed, we can already see it coming through in the data. We expect the stand-alone office workforce to contract this financial year” says Lee.

Apart from the economic factors, changes to the way businesses use office space are also impacting on demand for office space.

BIS Shrapnel highlights another negative influence on the demand for office space: falling workspace ratios – the amount of occupied office space per worker, a trend in recent years and one that is expected to continue

“This will compound the impact of a contracting workforce, leading to negative net absorption in 2012-13,” says Lee.

"Many operating in the market today will remember what it felt like to be operating in a market where the mood was depressed. That’s what we are set to return to,” Lee says.

Picture of Melbourne courtesy of Flickr.