Established Melbourne office market faces short term headwinds from Docklands and interstate departees: CBRE

The office market in Melbourne faces strong short term headwinds with the landmark projects in the Docklands precinct coming to market soon while major Melbourne tenants contemplate moving interstate, according to CBRE.

The overall assessment for Australia's national office outlook is flat given the likelihood of weak employment growth and structural changes in tenancy space efficiency.

In Melbourne, there are "risks" of major mining tenants moving to Perth while the Tatts Group have already announced a shift to Brisbane.

Many Docklands projects are coming to market in 2013 and 2014 which will also pull tenants away from the established Melbourne CBD, the report noted.

CBRE says more supply coming onto market at a time of weaker demand is likely to put pressure on rental growth.

Office rents in Melbourne grew 3% over 2012 but in 2013 that figure will drop to 1% in 2013 and 2% in 2013-2017.

CBRE says there will be a net absorption of 13,000 square metres, down from 49,100 square metres in 2012. Pre-GFC levels were 89,600.

The vacancy rate in Melbourne is expected to increase in coming years.

Across Australia CBRE finds major tenants like banks have been losing employees and focussing on using space more efficiently which will lead to a softer market.

“Flexible working and activity based working will limit future demand for space. This, coupled with improvements in technology allowing more employees to work remotely and increases in outsourcing means that achieving historical absorption rates will be more challenging,” writes CBRE head of research Stephen McNabb.

Perth is expected to be the strongest market though Queensland is expected to increase somewhat.

“Activity in the engineering pipeline is expected to keep economic growth strong over the next three years at least which should keep office market conditions tight with vacancy well below long term averages.”

“Little or no new supply will enter the Perth office market in the next two years but there is still underlying demand placing downward pressure on vacancy rates over the short term. This supports the strongest rental growth in Australia.”

The Queensland economy has been gaining momentum but this hasn’t necessarily translated into even job distribution across the market, the report finds. In Brisbane, employment was flat across the financial year whereas job numbers closer to resource activities jumped.

“This suggests a degree of regionalisation of employment in Queensland which contrasts to Perth, where the city is benefitting from strong mining/engineering construction activity in the north west WA.”

“New supply is expected to put some pressure on vacancy rates further out and is expected to hold back rental growth relative to historical averages.”

In Sydney the market is expected to remain balanced and tight in the short term with Barangaroo the main issue. A significant boost in demand is required to backfill CBD space.

“We struggle to find a surprise element that could pull the Sydney market higher.”

In Canberra softer demand from the public sector is expected to reduce demand with a muted forecast.

In Adelaide increasing supply will increase vacancy rates over the short term.