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RESEARCH
2
The Melbourne metropolitan
office vacancy rate fell from 5.2%
to 4.4% in the 12 months to
January 2019, sitting below the
historical average of 5.9%.
Prime net face rents grew at their
strongest rate in 11 years,
increasing by 7% in the 12
months to January 2019.
Investment demand for
metropolitan office assets
remained strong, with 2018
transaction volumes totalling
$767.9 million.
Yield compression has begun to
slow down. Prime yields
compressed by 13 basis points
in the 12 months to January 2019
to average 5.88%.
Associate Director
Strong population and
employment growth boosts
demand
Latest Australian Bureau of Statistics
data shows that Melbourne is the nation’s
fastest growing capital city, recording a
growth rate of 2.7% in 2018.
Off the back of strong population growth,
employment in Melbourne has also risen,
with Oxford Economics reporting that
employment grew by 3.1% in 2018.
Migration, both from overseas and
interstate is fuelling Melbourne’s
population growth, and in turn its
employment growth.
Government sets suburbs
up for jobs growth
Ongoing efforts are being made by the
state government to build up
employment and business activity in key
locations in line with population growth.
The state government is investing in the
development of National Employment
and Innovation Clusters across
Melbourne in Parkville, Monash,
Dandenong, La Trobe (Bundoora/
Heidelberg), Sunshine, Werribee and
Fishermans Bend. These emerging
business clusters have the potential to
accommodate significant future growth in
jobs in the metropolitan area.
Pivotal for the success of any
employment hub is the provision of
transport infrastructure. The state
government recently announced plans to
construct a $50 billion underground
suburban rail network which will connect
universities, hospitals and employment
precincts, and offer jobs growth close to
where people live.
Additional rail and road infrastructure
projects currently underway which will
benefit the metropolitan area include:
Metro Tunnel;
Level Crossing Removal;
West Gate Tunnel; and
Major upgrades to the M80,
Citylink and Tullamarine freeways.
Melbourne Metropolitan Office Market^ Indicators as at January 2019
Grade Total Stock
(sq m)
Vacancy
Rate (%)
12 Month Net
Absorption (sq
m)
Average Prime
Net Face Rent
($/sq m)
Average
Secondary Net
Face Rent ($/
sq m)
Average Prime
Core Market
Yield
(%)
Average
Secondary Core
Market Yield
(%)
Average
Prime
Incentive
(%)
City Fringe 1,026,247 2.2 3,579 450—580N 350—400 5.00—5.50 6.00—6.50 8—12
Inner East 552,949 3.2 3,436 385—475N 300—350 5.00—5.75 6.25—6.75 10—20
Outer East 910,138 7.3 21,850 300—350 220—270 6.00—6.75 7.00—7.75 20—30
South East 348,583 5.0 13,211 270—310 220—250 6.00—7.00 6.75—7.50 20—30
North & West 250,002 4.5 14,581 310—380 220—260 5.25—6.50 6.75—7.50 15—25
Total* 3,087,919 4.4 56,657 381 19 284 5.88 6.88
Annual Employment Growth Percentage change by year
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
2016 2017 2018 2019
AUSTRALIA VICTORIA MELBOURNE
3
RESEARCH
be developed in Essendon Fields over
the next few years as developers
attempt to entice corporates out of the
CBD with the offer of being
conveniently situated between the CBD
and Melbourne’s airports.
Some precincts in the North & West
region are attracting specific types of
tenants, such as University Hill in
Bundoora whose close proximity to
Austin Health and Northern Hospital is
prompting the rise of commercial
buildings focusing on the medical
sector.
Whole building pre-
commitments from the
Government sector The state government has also joined
the movement towards the North &
West, having pre-committed to 3,126
sq m at a whole building at 107
Overton Road in Williams Landing on a
15-year lease term. And more recently
in the Outer East region, the state
government has pre-committed to
another whole building (3,325 sq m) at
60-62 Maroondah Highway in
Ringwood on a 12-year lease term.
These large government pre-
commitments are in line with the state
government’s strategy to relocate
public sector jobs from the CBD to
metropolitan and regional locations in a
bid to stimulate economic growth and
bring jobs closer to home. The long-
term leases attached to these deals
reinforce the willingness of high profile
tenants to occupy prime-grade
buildings in suburbs with good access
to public transport and amenities,
acting as a catalyst for further
commercial development.
Expansions within existing
business parks
The last 12 months has also seen an
increase in leasing activity within
business parks, particularly in the Outer
East and South East regions. Business
parks continue to appeal to tenants due
to their affordability relative to inner city
locations, the credibility that comes
Strong demand as economy
performs well A strong local economy— evidenced by
GDP growth of 3.5% in 2018— and
growth in office based jobs—in particular
professional/scientific/technical services,
and administrative/support services— is
generating strong office demand in the
metropolitan office market. As evidence
of this, 56,657 sq m of positive net
absorption was recorded in 2018.
This growth has also driven Melbourne
CBD’s vacancy level down to its lowest
level in 10 years. This drop in vacancy is
placing upward pressure on rents, which
in turn is causing tenants to turn their
attention to the metropolitan office
market in search for more affordable
accommodation.
North & West see growing
demand The North & West region recorded
14,581 sq m of net absorption in 2018,
more than five times the figure recorded
in 2017. This surge in net absorption has
been driven by an increase in business
activity as businesses seek to capitalise
on recent population growth in the North
& West, particularly in the municipalities
of Wyndham and Melton.
Developers are taking note of the
increase in tenant demand. As an
example, 20,000 sq m of office space will
with their business address and their vast
array of on-site amenities such as gyms,
childcare services and medical centres.
Combined with heightened developer
confidence, this has seen a number of
business parks increase their footprint.
Latest additions to existing business
parks include 10 Nexus Court (10,000 sq
m) to Nexus Corporate Park in Mulgrave
and Stage 2 of Caribbean Park (16,000
sq m) in Scoresby. Both of these
additions were speculatively built and are
now fully occupied. Stage 3 of Caribbean
Park (17,000 sq m), which is also being
speculatively built, is currently under
construction and is set to reach
completion in the first half of 2019.
Low net absorption
continues in City Fringe Since 2014 there has been a dearth of
new office supply in the City Fringe, and
this has resulted in prolonged low levels
of net absorption. Over the last four
years, only 7,208 sq m of office space
has been absorbed in the City Fringe.
While a windfall of new supply is
expected to arrive in the City Fringe in
2019 and 2020, with demand in the CBD
strong we expect much of this new City
Fringe supply to be absorbed.
Metropolitan Office Net Absorption Per calendar year (000’s sq m)
0
10
20
30
40
50
60
70
80
2013 2014 2015 2016 2017 2018
Net Absorption & Outlook
Overall 2018: 56,657 sq m
MELBOURNE METROPOLITAN OFFICE APRIL 2019
Metropolitan Office Net Absorption By Region (sq m)
-25,000
-5,000
15,000
35,000
55,000
75,000
95,000
2011 2012 2013 2014 2015 2016 2017 2018
CITY FRINGE INNER EAST OUTER EAST
SOUTH EAST NORTH & WEST
4
City Fringe new supply set
to take off in 2019 & 2020
In 2018, new supply added to the
metropolitan office market totalled
27,693 sq m, down 8% from 2017. The
North & West region accounted for most
(64%) of the new supply in 2018,
following the completion of 1-3 Janefield
Drive, Bundoora and Target’s new head
office at 2 Kendall Street, Williams
Landing. Looking ahead, close to 55,000
sq m of new supply is anticipated to be
added to the metropolitan office market
in 2019.
The City Fringe region is poised to
become the next office development
hotspot as developers tap into the heavy
demand in Richmond, Cremorne and
South Melbourne. More than 150,000 sq
m of new supply is expected to be
delivered across the City Fringe region
over the next two years. This is the
biggest boost to supply the region has
ever seen (Figure 4) and the number is
likely to grow as more office schemes are
put forward.
Speculative development
pipeline displays market’s
strength
Speculative space is making up a large
two-thirds of new supply in 2019.
Developers are choosing to build without
firm tenant commitments as tightening
vacancy and rising rents signpost strong
market conditions. Demand for
metropolitan office space is being
underpinned by strong population growth
and an increasing number of tenants
looking to occupy space outside of the
CBD. In some instances, prospective
tenants are enquiring about occupying
whole speculative buildings.
Easing residential market
renews demand for office
development
As the residential market weakens and
demand for metropolitan office space
intensifies, a growing number of
residential developers are exploring the
potential of office developments. This is
particularly evident in Box Hill which is
evolving into a major employment hub
and in South Yarra which is transforming
into a more mixed-use precinct.
Additionally, sites once tipped for
residential development are shifting to
office as the residential market continues
to experience a downturn. Approval for a
Metropolitan Vacancy Rates by Grade
(%)
Grade Jan-17 Jan-18 Jan-19
Prime 8.4 5.6 5.1
B-Grade 6.3 5.7 4.1
C-Grade 4.3 3.3 3.0
Secondary 5.6 4.8 3.7
Total 7.0 5.2 4.4
Metropolitan Gross Supply Pipeline by
Region 000’s sq m excl. refurbishments
0
20
40
60
80
100
120
140
160
180
200
2014 2015 2016 2017 2018 2019 2020
CITY FRINGE INNER EAST OUTER EAST
SOUTH EAST NORTH & WEST
Historical average
Projection
Metropolitan Vacancy Rate by
Region Total vacancy (%)
0%
2%
4%
6%
8%
10%
12%
14%
Jan-1
3
Jan-1
4
Jan-1
5
Jan-1
6
Jan-1
7
Jan-1
8
Jan-1
9
CITY FRINGE INNER EAST
OUTER EAST SOUTH EAST
TOTAL NORTH & WEST
Vacancy Rate & Outlook
Prime 5.1%
-50 bps y-o-y
Secondary 3.7%
-110 bps y-o-y
24-storey office tower on Chapel Street
in South Yarra has recently been granted
to Goldfields after its previous owners’
proposed plans to develop a residential
tower was rejected. The site is located
opposite the upcoming $700 million
Capital Grand apartment complex.
Vacancy declines further
The overall vacancy rate decreased for
the third consecutive year, falling from
5.2% to 4.4% in the 12 months to
January 2019, underpinned by positive
net absorption and relatively low levels of
new supply. All precincts recorded a
healthy fall in vacancy over the 12-month
period.
New supply is set to double in 2019
(Figure 4) and with a large proportion of it
being speculative space, vacancy is
expected to lift slightly. Nevertheless,
strong demand for suburban office space
is anticipated to continue and this will
ensure the vacancy rate remains well
below the historical average of 5.9%.
5
RESEARCH
Major Office Supply— Melbourne Metropolitan Office Market
Address Suburb Region Area (sq m) Developer/Owner Stage Est. Date of
Compl.
10 Nexus Court Mulgrave Outer East 10,000 Salta Complete Q2 2018
1-3 Janefield Drive Bundoora North & West 4,774 Noordenne Complete Q2 2018
2 Kendall Street~ Williams Landing North & West 12,919 Cedar Woods Complete Q2 2018
Botanicca 9, 588 Swan Street Richmond City Fringe 7,173 GARDA U/C Q2 2019
139-153 Camberwell Road Hawthorn Inner East 8,500^ Blueprint Projects U/C Q2 2019
Stage 3, Caribbean Park Scoresby Outer East 17,000 Spooner Family U/C Q2 2019
51 Langridge Street Collingwood City Fringe 3,436 Pace Development U/C Q4 2019
2-16 Northumberland Street Collingwood City Fringe 15,000 Impact Investment U/C Q4 2019
107 Overton Road Williams Landing North & West 3,126 Cedar Woods U/C Q4 2019
68 Clarke Street South Melbourne City Fringe 9,845 Hickory Group U/C Q1 2020
101 Moray Street South Melbourne City Fringe 15,000 Deague Group U/C Q1 2020
3 Newton Street Cremorne City Fringe 5,000 Private investor U/C Q2 2020
600 Church Street Richmond City Fringe 6,000 ICON U/C Q2 2020
Botannica 3, 572 Swan Street Richmond City Fringe 20,000 Growthpoint U/C 2020+
60-68 Cremorne Street# Cremorne City Fringe 27,653 Cremorne Properties DA Approved Q1 2020
57 Balmain Street≠ Cremorne City Fringe 7,800 Zig Inge DA Approved Q1 2020
MELBOURNE METROPOLITAN OFFICE APRIL 2019
Metropolitan Office Regions
6
Prime Net Rents and Incentives By region as at January 2019 ($/sq m)
0%
5%
10%
15%
20%
25%
30%
0
100
200
300
400
500
600
CITY
FRINGE
INNER
EAST
OUTER
EAST
SOUTH
EAST
NORTH
& WEST
TOTAL
PRIME NET FACE (LHS) PRIME INCENTIVES (RHS)
Net Face Rental Growth Year-on-year by region as at January 2019 (%)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
CITY
FRINGE
INNER
EAST
OUTER
EAST
SOUTH
EAST
NORTH &
WEST
TOTAL
Recent Leasing Activity Metropolitan Melbourne
Address Precinct NLA
(sq m)
Term
(yrs)
Lease
Type Tenant
Start
Date
60-88 Cremorne Street, Richmond City Fringe 19,300 U/D Precom Seek Q1-20
57-61 Balmain Street, Cremorne City Fringe 7,800 U/D Precom Reece Group Q1-20
2-16 Northumberland Street, Collingwood City Fringe 6,750 U/D Precom Aesop Q3-19
107 Overton Road, Williams Landing North & West 3,126 15 Precom Minister for Finance Q3-19
658 Church Street, Richmond City Fringe 7,000 U/D New 7-Eleven Q2-19
1A Oxley Court, Hawthorn East Inner East 1,450 2.5 New Xero Q2-19
1 Nicholson Street, East Melbourne City Fringe 2,700 U/D New Hub Australia Q2-19
1 Caribbean Drive, Scoresby Outer East 9,460 U/D New Clevertronics Q2-19
75 Hudson Court, Keysborough South East 1,057 5 New Traffic Control Victoria Q2-19
110 Chifley Drive, Preston North & West 1,660 6 New Omni-Care Q2-19
588 Swan Street, Richmond City Fringe 1,585 U/D New McLardy McShane Q1-19
68-70 Rodeo Drive, Dandenong South South East 1,768 6 New Bates Concrete Construction Q1-19
14-16 Prospect Street, Box Hill Outer East 950 7 New FraudWatch International Q1-19
10 Nexus Court, Mulgrave Outer East 4,485 U/D New City Holdings Q4-18
Prime rents rise in response
to vacancy rates falling On the back of another year of declining
vacancy, the metropolitan office market
recorded strong prime rental growth
across all regions as tenants compete for
dwindling available space.
Prime net face rents grew at their
strongest rate in 11 years, increasing by
7% in the 12 months to January 2019 to
average $381/sq m. Incentives remained
unchanged, with most deals being struck
within the 15% to 23% incentives range.
Reflecting the drop in vacancy, the South
East region outperformed all other
regions in prime rental growth (+9.4%).
The Inner East (+8.9%) and City Fringe
(+8.4%) regions also saw notable prime
rental growth.
The lift in rents in these regions was
driven by tenants’ readiness to pay more
for locations that hold particular appeal
to employees. The North & West (+4.5%)
and Outer East (+3.2%) regions showed
slower prime rental growth.
Looking ahead, prime net face rents are
anticipated to continue increasing over
the next 12 months as quality leasing
options become limited and tenants get
drawn from the CBD to the metropolitan
area. Prime rental growth in the City
Fringe region will remain one of the
strongest, however, with substantial new
supply coming on line over the next two
years, rents are likely to stabilise in 2020.
Rents, Incentives & Outlook
Prime
Rents (n)
$381/sq m face
7.0% gth y-o-y
$309/sq m eff
7.0% y-o-y
Secondary
Rents (n)
$284/sq m face
5.4% gth y-o-y
$230/sq m eff
5.4% y-o-y
Incentives P: 19.0%
S: 19.0%
7
RESEARCH
CBD office market has also played a role
in 2018’s strong investment performance.
Increased competition for a diminishing
number of assets on offer in the CBD has
shifted investment interest to the suburbs
where investors are able to pursue assets
offering stronger yields.
Offshore investors most
active With competition high for CBD office
assets and a growing perception that the
Australian office market offers a safe
investment environment, offshore
investors continue to increase their
presence in the metropolitan office
market. In all, offshore investors
comprised 28% of sales by purchaser
type in 2018, up by 16% from 2017.
Investors get opportunistic Many of the transactions that took place
over the course of 2018 comprised of
assets with development potential. Such
assets are mostly located in the City
Fringe where development interest has
lifted on the back of tightening vacancy,
rising rents and rapid growth in land
values.
Yield compression softens Strong competition for metropolitan office
assets has pushed yields down further.
Prime yields compressed by 13 basis
points in the 12 months to January 2019
to currently range between 5.45% and
6.30%.
Investment demand shifts to
the metropolitan office
market Metropolitan office assets were in high
demand in 2018, with transaction
volumes ($10 million+) totalling $767.9
million across 27 transactions. The slight
decrease in investment activity from the
year before (-3.2%) was heavily
underpinned by two $100+ million deals
in 2017.
That being said, strong property
fundamentals—solid tenant demand and
strong growth in rents—paved the way
for a strong performance in investment
activity in 2018.
A shortage of investment stock in the
Despite showing compression over the
year, yields have softened in recent
months, bringing to an end a long period
of sustained compression.
Nevertheless, there remains a deep buyer
pool for quality metropolitan office assets
underpinned by the strength of tenant
demand and the potential for further
rental growth.
Recent Sales Activity Metropolitan Melbourne
Address Price
($ mil)
Core
Mkt
Yield
(%)
NLA
(sq m)
$/sq
m
NLA
Vendor Purchaser Sale
Date
60-62 Maroondah Hwy, Ringwood≠~ 28.30 5.30* 3,325 8,511 Macau investor Pellicano Group JV CPG# Dec-18
105 York Street, South Melbourne 49.00 5.05 5,101 9,606 Mitchell Family Office Patterson Cheney Holdings Sep-18
67-78 Trenerry Crescent, Abbotsford^ 41.00 5.75 5,439 7,538 Holckner family U/D Sep-18
1 Chapel Street, Blackburn 30.20 6.47 5,758 5,244 Rupert Murdoch Vantage Property Investments Aug-18
594-600 Church Street, Richmond~ 50.00 5.69 5,674 8,812 ICON Bayley Stuart Jun-18
Bldg 1, 195 Wellington Road, Clayton 24.58 7.19 4,239 5,797 Pioneer House IOOF Apr-18
Current Yields & Outlook
Prime 5.45% - 6.30%
-13 bps 12 mths
Secondary 6.55% - 7.20%
-5 bps 12 mths
Metropolitan Office Sales $10
Million+ By region ($m)
0
200
400
600
800
1,000
1,200
2014 2015 2016 2017 2018
CITY FRINGE INNER EAST OUTER EAST
SOUTH EAST NORTH/WEST REGIONAL
Metropolitan Yields & Risk Spread Core market yields & prime vs secondary
spread (bps)
50
75
100
125
150
175
200
225
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
Jan-1
0
Jan-1
1
Jan-1
2
Jan-1
3
Jan-1
4
Jan-1
5
Jan-1
6
Jan-1
7
Jan-1
8
Jan-1
9
RISK SPREAD (RHS) PRIME YIELD (LHS)
SECONDARY YIELD (LHS)
MELBOURNE METROPOLITAN OFFICE APRIL 2019
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Sydney Suburban
Office Market Brief
February 2019
Australian Capital View
Outlook 2019 The Wealth Report
2019
Knight Frank Research Reports are available at KnightFrank.com.au/Research
Melbourne CBD
Office Market
Overview March
2019
Important Notice
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any way. Although high standards have been used in the preparation of the information, analysis, views and projections
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RESEARCH & CONSULTING
Finn Trembath Associate Director, Victoria
+61 3 9604 4608
[email protected] Ben Burston Partner, Head of Research & Consulting
+61 2 9036 6756
CAPITAL MARKETS
Paul Henley Partner, Head of Commercial Sales,
Australia
+61 3 9604 4760
[email protected] Danny Clark Partner, Head of Commercial Sales,
Victoria
+61 3 9604 4686
[email protected] Tim Grant Partner, Head of Eastern Office, Victoria
+61 3 8545 8611
OFFICE LEASING
Hamish Sutherland Partner, Head of Office Leasing
+61 3 9604 4734
[email protected] James Treloar Director, Head of Metropolitan Leasing
+61 3 8545 8619
[email protected] Adam Jones Director, Office Leasing
+61 3 9604 4647
VALUATION & ADVISORY
Michael Schuh Partner, Joint Managing Director
+61 3 9604 4726
Metropolitan Stock Definition:
Includes office stock in the Melbourne metropolitan area above 1,000 sq m in size. It
excludes stock in the CBD and the major office markets of St Kilda Road and Southbank.
Major suburbs for each region are as follows:
City Fringe: Carlton, Richmond, East Melbourne, Port Melbourne
Inner East: Hawthorn, Camberwell, Kew, Malvern, South Yarra
Outer East: Box Hill, Mount Waverley, Mulgrave, Burwood
South East: Cheltenham, Moorabbin, Dandenong
North & West: Footscray, Moonee Ponds, Essendon