Melbourne office vacancy rate to hit 10% by end of 2013 with BIS Shrapnel warning of “market panic”

Melbourne office vacancy rate to hit 10% by end of 2013 with BIS Shrapnel warning of “market panic”
Melbourne office vacancy rate to hit 10% by end of 2013 with BIS Shrapnel warning of “market panic”

The Melbourne CBD office market is moving increasingly in favour of tenants over landlords with BIS Shrapnel forecasting the vacancy rate to hit 10% by the end of the year.

BIS Shrapnel senior project manager Maria Lee expects the vacancy rate to remain at 10% over 2014 and warns there could be market “panic” from some landlords, not anticipating the size or duration of the downturn.

She warns existing investors and those entering the market now need to be prepared for a sustained period of challenging conditions and to plan their leasing strategies accordingly with cash preservation key.

However, a strong rebound is forecast in the second half of the decade with fundamental economic conditions driving the Victorian economy still in place.

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But from now until sometime in 2015, the market is likely to get worse before it gets better pushing up leasing incentives and causing effective rents to retreat.

“This is a more severe setback, caused by weakness in the Victorian economy on several fronts," Lee says.

Lee expects leasing incentives to rise further, to an average of 34 months’ rent free equivalent in the prime market.

“The other side of the coin is that conditions are favourable to tenants.

“Tenants already hold the balance of power in leasing negotiations, and that will continue to be the case for some time; there’s no need for tenants to rush their leasing decisions” she adds.

A similar prognosis of the Melbourne office market is made by property valuers Propell.

“Melbourne still has one of the lowest vacancy rates in the nation, but that is now changing with the amount of vacancy to increase considerably in coming years, which will put a brake on rental and value growth,” says Propell in its latest report.

Propell says falling demand combined with additional new supply will see the vacancy rate “rise considerably over the next couple of years”.

Around 129,000 square metres of new office space was added to the Melbourne market in 2012, but demand was for less than 40,000 square metres of new space last year.

Over the past five years, demand has averaged 60,000 square metre annually.

“The economic slowdown in Victoria is having its effect on the office market too, and while net absorption is still healthy, it is slowing," says Propell.

“With the slowing of economic activity in Victoria, the reduction in net take-up and the amount of new construction, the outlook is for vacancy rates to increase over the next two years, with rents under downward pressure.

“Dwelling building activity is declining, there are severe cuts to public sector investment, and the high Australian dollar is taking its toll on manufacturing and some service industries,” she says.

The Property Council of Australia reported the vacancy rate rising from 5.6% to 6.9% over the six months to January 2013, its highest level in six years, and attributed to increased supply.

The highest vacancy rate was recorded in Flagstaff (13.9%), the Western Core (8.2%), Eastern Core (7.1%) and Spencer Street (6.9%).

The tightest office zones in the Melbourne CBD are the North Eastern zone (2.5%) and Docklands (3.5%)

In terms of office grades, the tightest market is D grade office space, with a vacancy rate of 2.2% with the premium office vacancy rate at 6% and the A grade office vacancy rate at 5.8%. 

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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