Major CBD office shortage to hit Melbourne

Melbourne is on the verge of its last major influx of CBD office space ahead of a shortage that could last beyond 2020, according to new research.

Colliers International research shows vacancy is expected to plummet due to a lack of new stock in the near future, with rents already soaring as a result.

Colliers national director of office leasing Andrew Beasley says that while significant space at a number of major A-grade buildings will become available between now and the end of 2017, that will be the last new space for some time.

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The space soon to come online includes 21,000sqm of backfill at 161 Collins St, 23,000sqm at Freshwater Place, 20,000sqm at 2 Lonsdale St and and 16,500sqm at 360 Collins St.

“The majority of these backfill options, with the exception of 360 Collins St, won’t be coming online until mid-to-late 2017, however we are already seeing a great deal of tenant activity within these options and anticipate the bulk of the space within the buildings will be spoken for prior to completion of refurbishment works,” Beasley says.

Melbourne’s CBD office market is expected to experience an extended period of undersupply.

“Once this space is taken up, we are going to see a significant shortage of supply. Vacancy will also really tighten up by 2018 and into 2019.”

“If you’re looking for premium and A-grade office space in the 10,000sqm range, you want to be located centrally on or around the core Collins St precinct and you have an expiry looming in 2018 to 2019, you could find your options very limited with regards to where you can go on the basis that the majority of new supply won’t be coming online until late 2019 to mid-2020.”

Compounding the shortage, only three new CBD office buildings are currently under construction, Colliers national director of research Anneke Thompson points out.

Building 2 and Building 4 at Collins Square are due for completion this month and later this year, respectively, while 664 Collins St is expected to be finished in June 2018.

Once this space is taken up, we are going to see a significant shortage of supply

“This is the last push of supply for Melbourne’s CBD, before both Docklands sites and CBD grid sites start to run out beyond 2020,” Thompson says.

“Beyond that, we see vacancy falling further, as the supply pipeline really starts to thin out.”

Colliers expects overall office vacancy in Melbourne’s CBD to flirt with the 5% barrier, while the A-grade market is tipped to be as low as 5.6%, with rents to respond in kind.

Prime space in Melbourne’s CBD is expected to dry up in the coming years.

“We are already seeing the market respond, with our very latest rental data showing strong 8.6% annual growth in net effective rents for premium-grade space, and 6.1% for A-grade,” Thompson says.

“To put this in context, the annual average growth rate over the past 10 years has been 3.1% and 3.5% respectively, so the market is really accelerating. The B-grade market is also responding to lack of supply, and effective rents have increased by 6.5% in this grade also.”

The news comes as Savills research reveals that options are fast running out for businesses wanting more than one full floor of office space in the same building in Melbourne’s CBD.

Savills’ Victorian research manager Monica Mondkar says that while 175 prime full floors are currently available – the lowest level since 2012 – just 19 of these are consecutive floors in the same building.

“The fact that 175 prime floors are available can be misleading in terms of options, with only 19 contiguous floors available, while single-floor options are also limited by just where those floors are – in what building, on what street, in which precinct and at what end of town,” Mondkar says.

Mondkar says available full floor space has dropped 20% since the end of December, from 339,022sqm to just 270,486sqm, with available full floors down from 220.