Suburban Melbourne office pipeline soars in 2015: Knight Frank

After three years of consecutive rises, the vacancy rate in the Melbourne suburban office market fell to 6.3% as at January 2015, declining by 120 basis points over the 12 month period, according to a Knight Frank report.

New supply is projected to record its second highest annual level ever in 2015, it noted. Supply has been boosted by increased levels of speculative development with more than 40,000 square metres under construction.

Boosted by a record number of sales in excess of $30 million, office investment activity in the Melbourne suburban office market reached an all time high in 2014.

Knight Frank forecasts suburban office market was expected to be driven by growth in the health care, professional services and retail trade sectors. It noted since 2012, net face rents across the suburban office market have largely remained stable.

In the 12 months to January 2015, average suburban A-grade net face rental levels increased by a mere 0.5% which was the weakest annual A-grade rental growth rate over the past three years.

Average suburban secondary net face rental levels decreased by 2.3% over 2014, impacted by the tenants’ preferences for prime quality accommodation.

While incentive levels in City Fringe and Inner Eastern precincts remain elevated to compete with the CBD office market, solid tenant demand and a lack of large available options should result in effective rental growth over the next 12 months, particularly for the City Fringe precinct.

In contrast, the impending level of backfill space is likely to lead to further softening in the Outer Eastern precinct, particularly for secondary grade offices with incentive levels anticipated to increase, the report noted.

The report noted a record number of sales in excess of $30 million, with office investment activity in the Melbourne suburban office market at an all time high in 2014.

Investment sales activity (above $10 million) in 2014 within the suburban office market totalled $711.67 million from 22 properties. The volume of sales achieved in 2014 was 118% higher than the long term average, and in fact, 37% higher than the previous record high set last year.

Source: Knight Frank

Following a subdued first quarter, investment activity surged in the final quarter with transactions totalling $487 million, higher than the historical average yearly suburban sales total.

Over the course of 2014, there were nine sales in excess of $30 million, accounting for 71% of total sales volume.

Two of the transactions recorded in 2014 were the third (60 Brougham St, Geelong— $95.8 million) and 4th (6-22 Gladstone St, Moonee Ponds—$83 million) highest suburban office sales ever.