Forecasts of a Melbourne office recovery premature: BIS Shrapnel

Expectations that Melbourne's CBD office market is in recovery mode have been declared premature by as much as 18 months.

The cautious assessment was revealed in BIS Shrapnel’s latest Melbourne Commercial Property Prospects 2014 to 2024 report which disputes claims that the mid-year fall in the city's CBD office vacancy rate from 9.8% to 8.7% as at December 2013 was a sign of a turnaround.

Instead, BIS Shrapnel senior project manager and report author, Maria Lee, attributed the reduction in vacancy rate in December 2013 to an unusually high level of withdrawals from stock.

"Had it not been for those withdrawals, the vacancy rate would have increased because net absorption was very weak", said Lee.

BIS Shrapnel doesn't expect such high levels of withdrawals to continue.

"The market will have trouble absorbing the quantum of floor space due for completion this year and next", she said.

"That said, due to the lumpy nature of completions it’s quite possible that the vacancy rate will fall temporarily in June 2014, but essentially we are bumping around the bottom in terms of the leasing market, vacancies and rents.”

BIS Shrapnel expects net absorption to remain fairly moderate in the near term, albeit it should pick up from the 10 year low recorded in calendar 2013.

Driving that view is the sustained soft patch in the Victorian economy. Specifically, Lee points to residential building activity falling, non-residential building being subdued and cuts in government investment a drag on growth.

She added that the high Australian dollar over the past few years had hit Victoria’s key trade-exposed industries, namely agriculture, manufacturing, finance and business services, international student education, and tourism.

Those factors "will not turn around immediately", said Lee.

BIS Shrapnel’s report sets out several reasons why the weakness in the Victorian economy is likely to continue for at least the next year before stronger fundamentals begin to reassert themselves:

• Total building activity is likely to be soft for some time, dragged down by the residential sector despite the inner city apartment boom underway.
  
  
• New public investment is expected to continue to trend downwards over the near-term as the state government attempts to consolidate the budget.
  
  
• Engineering construction work done has further to fall due to the lack of major projects (apart from East West Link).
  
  
• The Australian dollar is not yet weak enough to significantly boost the competitiveness of the state’s trade exposed sectors. Meanwhile, the closures of Ford, Holden and Toyota are a particular blow.

BIS Shrapnel anticipates that Victoria’s pace of economic growth will underperform against the national average for a "few more years".

For landlords and tenants, the report said, that meant that leasing incentives were likely to remain high for some time yet, continuing to affect owners but affording tenants a great opportunity to lock in low rents and/or upgrade to better quality accommodation.

Despite those headwinds, Lee made a point of saying that the economy was fundamentally strong and that the key drivers that underpinned the strength of the Victorian economy last decade were still in place.

"Consequently, the report forecasts a strong rebound in Melbourne’s office market in the second half of this decade," she said.