Melbourne CBD office leasing continues its strong momentum

Melbourne CBD office leasing continues its strong momentum
Melbourne CBD office leasing continues its strong momentum

Victoria’s economy continues its impetus with the strongest population growth in the nation and a major focus on jobs growth. Latest ABS figures reveal that the largest increases in employment were recorded in Victoria (up 103,900 persons) over the 12 months to May 2017. 

Knowledge and Public service industries have been a key feature underlining the office leasing demand into the CBD which has continued its momentum with Savills latest research showing a significant lift in the June quarter over the previous 12 months.

According to Savills Associate Director, Research & Consultancy, Monica Mondkar, 426,914 square metres of space was leased in the Melbourne CBD in the 12 months to June 2017 (leases greater than 500sq m), of this 79 percent was prime grade. Total leasing activity is up a staggering 54 percent on the previous corresponding period and 53 percent above the prior five year average of 279,612 square metres.

Ms Mondkar said Savills research also revealed a strong pre-commitment market at 164,942 square metres – up 237 percent over the past year, accounting for 39 percent of the leasing activity. Direct leasing activity continued its upward trend at 161,481 square metres, accounting for 38 percent of the total take-up.

Victoria’s steady economic growth was the key driver while the lure of attractive new Docklands space accounted for significant tenant migration within the market, said Ms Mondkar.

The State’s economy is expected to grow at 3.4 percent in 2017-18, above the national average of 2.9 percent*. “We expect this economic trend to continue with business optimism supporting growth in tenant demand, resulting in a higher level of leasing activity in the near term,’’ Ms Mondkar said. 

According to Deloitte Access Economicsfigures Melbourne CBD’s white collar employment grew by 25,000 workers from 2012 to 2017, and is forecast to rise by another 30,000 workers over the next five years, while Dun & Bradstreet’s Business Expectations Index was recorded at 17.3 points for the third quarter of 2017, up from 12.4 in the previous corresponding period, and 8.1 points above the 10-year average.

Savills State Director of Office Leasing, Mark Rasmussen, said office leasing activity in 2017 featured an above average absorption of space, rising rents and falling incentives. 

He said whilst significant tenant requirements remained in the market - current enquiry levels (above 500sq m) are at 263,275 square metres for the CBD market – the outlook over the next 18 months was very positive.

“The market has definitely continued to strengthen over the course of 2016-17 and especially since the federal election last year. We have seen a rebound in business confidence leading to the dramatic rise in pre-commitment activity. We expect this demand to continue in the medium term. 

“The Melbourne CBD office market has traditionally been home to a wide range of occupiers including Finance & Insurance, Property & Business and IT & Communication, however tenant demand from the Government and community sector over the past two years has seen robust growth along with the rise in the sub-sector of Education’’ he said.

The Government and community sector was the dominant tenant sector, leasing 40 percent of the stock, or 168,219 square metres over the 12 months, while Property and Business services was second accounting for 24 percent, followed by IT & Communication at 18 percent of the total office leasing activity. The Education sub sector absorbed 53,577 square metres of office space in Melbourne CBD over the past 12 months, up from 16,410 square metres leased a year ago, a massive climb of 226 per cent from the previous year. This unabated demand is expected to continue with current enquiry levels at 18,500 square metres to be leased in next six months.

Mr Rasmussen said net face CBD rents now typically range from $490 to $600 per square metre for A Grade quality stock, and between $390 and $455 per square metre per annum for B grade buildings. Vacancy rates in 2017-18 will continue to tighten, reducing the number of options and incentives for tenants. Falling incentives will boost the effective rental growth which will continue its upward trajectory until the new supply comes online in 2019-20.

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 Melbourne CBD office leasing continues its strong momentum

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 Melbourne CBD office leasing continues its strong momentum

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Savills Commercial Property

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