Double-digit rental growth predicted for Melbourne office market

Prime office rental growth in the Melbourne CBD is forecast to outpace all other CBD markets in the country over the next 12 months, according to research from Savills.

The Savills May Melbourne CBD Office Report shows that the available prime office space fell from 41 to 39 floors from March to April while the availability of premium-grade office space has fallen dramatically. From December 2009 to December 2010 the prime grade vacancies have fell from 8.7% to 5.8%.

Claire Cupitt, associate director of research of Savills, told Property Observer a lack of new supply would continue to push up rents.

“The CBD market has experienced double-digit growth over the last two years, and this is set to continue until 2012,” Cupitt says, after which rental growth will ease off.

No new major office projects are expected to be completed until 2012, when five projects ranging between 12,000 square metres and 37,000 square metres are due to be completed.

The biggest of these is the 735 Collins Street Stage 1 development in Docklands, which will have a net letable area of 38,000 square metres and will be tenanted by the Australian Tax Office. The second stage of the project, 23,000 square metres, is due for completion in 2013 and will be tenanted by financial services group Marsh Mercer.

In 2013, the biggest project due to be completed is the 63,000-square-metre NAB building at 720 Bourke Street, also in the Docklands area.

The report says “appetite for Premium and Grade A assets continues to strengthen, with institutions and foreign investors admiring the strong fundamentals of the Melbourne CBD office market”.

Thirty-two commercial office sales with a total value of $1.24 billion were completed in the year to March 2011.

In March 2011, diversified property group Challenger paid $81 million for 27-floor A-grade office at 31 Queen Street, with a yield of 8.17%. 

In December 2010 superannuation fund Sunsuper paid $108 million for the 17-floor 330 Collins Street office building, with a yield of 8%.

The largest leasing deal recently completed was the 18,700-square-metre lease at 661 Bourke Street, signed with the Department of Defence.

Market yields in the Melbourne CBD as at March 2011 are estimated to range between 7.25% and 8% for A grade buildings, and between 8.5% and 9.5% for secondary grade buildings.

In total Savills has identified more than 50 development sites within the Melbourne CBD, with the potential for 1 million square metres of office space.

The last major Melbourne CBD office construction phase ended with the onset of the GFC. It added 465,000 square metres to the CBD, 528,000 square metres to the CBD fringe markets of Southbank and Docklands, and approximately 20,000 square metres to the St Kilda Road precinct – a total of 1.013 million square metres. 

According to Savills, the Melbourne CBD office market contains 3.602 million square metres of lettable space. Of this, more than half (about 2 million square metres) is of premium and A grade quality, 953,068 square metres of grade B quality and the balance (642,407 square metres) grades C and D.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer


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