Melbourne CBD office vacancy rate lowest in Australia: HTW Commercial

The Melbourne office market vacancy rates, in particular in the Melbourne CBD, city fringe and inner east, are lower than the long-term average vacancy levels and are anticipated to further decline in the second half of 2019, according to the latest Commercial Market report from Herron Todd White.

The Melbourne CBD’s overall office vacancy rate was at 3.2% in January 2019, the lowest of all of Australia’s CBDs. according to the Property Council of Australia’s Office Market Report. 

According to HTW's property valuation reporters, there is limited new supply and available stock in the market until 2020. 

The robust leasing market is also being fuelled by healthy tenant demand driving strong rental growth in both face and effective levels.

Due to the rise in CBD rentals, the city fringe precinct continues to gain popularity from the creative, technology and professional services sectors.

Tenant demand is also strong in the inner east markets, particularly in highly soughtafter suburbs such as Richmond, Cremorne and Hawthorn. The inner east has a vacancy rate of 3.58%, the lowest amongst all of the metro precincts in Melbourne.

The June report stated, "It is expected that rental growth will continue for the remainder of 2019 in these precincts for well-located, good quality stock. Sales demand is particularly strong for well-located, land-rich investment assets."

"A circa 1990 double storey office building at 79-83 High Street, Kew (pictured in title) sold off-market ahead of the launch of an EOI campaign for $19 million in April 2019, reflecting a passing yield of approximately 6.2%. The property comprised 19 strata units with a total lettable area of approximately 3,361 square metres situated on a 3,760 square metre Commercial 1 zoned land allotment."

"The building had 10% vacancy and was sold to fund manager, Terraplex, with intentions to refurbish the building and potentially add extra floor space," they noted.

In the outer suburban market, the sale at 347-351 Burwood Highway, Forest Hill represents the largest metropolitan office transaction this year.

The property was sold to an adjoining owner, a Melbourne based developer, for $45.85 million in April 2019.

The property is situated opposite the Tally Ho Business Park and comprises a 2.62 hectare Commercial 1 zoned allotment improved with two office buildings with a combined net lettable area of approximately 10,692 square metres.

The property is approximately 70% leased to a variety of tenants including NEC, Bolton Clarke and Hamilton Morello.

The HTW valuers said, "we highlight that the purchaser elected to purchase the property as is without a 30% rental guarantee from the vendor and without deduction of outstanding incentives. The property has a WALE (by income) of 3.4 years and a reported reversionary yield of approximately 7.32%."

"The relatively low yield for an asset of this nature with sizeable leasing risk demonstrates the confidence buyers currently have in the Melbourne metropolitan office market."

"Due to the slowdown in the residential market and tightening lending criteria, demand for development sites within the inner suburban region has declined somewhat, however we are aware of ongoing, albeit subdued demand from developers seeking to secure well located sites to establish mixed use developments within close proximity of neighbouring retail strips, amenities and public transport."

"It is uncertain when residential market conditions will begin to recover and purchasers are cautious that any future downturn in economic activity may lead to a reduction in demand and market value, however we note that demand for commercial development sites, particularly sites with holding income, is strong in inner city areas such as Richmond, Cremorne and South Melbourne where developers are intending to deliver commercial office projects instead of apartment projects in the current market to capture the strong office leasing and sales conditions," they concluded.