Office space exodus continues on St Kilda Rd

St Kilda Rd office space continues to be sought after for residential developments.

The decline of prime office options in Melbourne’s St Kilda Rd precinct is either a boon or a bust, depending on your outlook, one agency says.

St Kilda Rd – the main thoroughfare leading south from the CBD – has lost 51,500sqm of lettable office space over the past two years to residential conversions, CBRE research shows, with vacancy subsequently hit hard and incentives also taking a dive.

Prime vacancy in the precinct is now at 6%, down from 14.2% in 2011, with rents rising 2.5% last year and incentives now down to 22%, according to the agency’s The Future of Office in the St Kilda Road Precinct report.

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While the stock withdrawal and subsequent decrease in available space is bad news for tenants, CBRE Advisory and Transaction Services – Office director Anthony Park says it has breathed new life into the area.

“The trend towards residential conversion on St Kilda Rd has had a positive impact on the office market as these developments have brought fresh retail amenity and helped improve the overall offering for prospective occupiers,” Park says.

Over the past five years, the additional cost to rent secondary grade space in the CBD over St Kilda Rd has trended downwards

“Furthermore, as secondary office buildings are withdrawn from the market, it has forced remaining building owners to improve their assets to ensure they are well placed to meet the demands of the modern occupier.”

“These improvements, combined with the tightening of the market have seen solid face rent growth and the pulling back of incentive levels – resulting in healthy effective rental growth.”

The decline in available office space is set to continue, with a further eight buildings totalling 56,000sqm to be withdrawn for residential conversion along St Kilda Rd over the next three years.

But the outlook for tenants is significantly better in the secondary office market, which currently has around 17% vacancy.

CBRE senior research analyst Anne Flaherty says the cost and quality of secondary grade office space in the nearby CBD has seen many tenants move there, opening up opportunities on St Kilda Rd.

“Over the past five years, the additional cost to rent secondary grade space in the CBD over St Kilda Rd has trended downwards,” Flaherty says.

“However, this has also provided greater opportunities for developers, with 90% of the total 85,400sqm withdrawn over the past decade considered to be secondary space.”