Melbourne CBD Office Leasing Continues To Improve

September Quarter leasing up 79 percent on previous 12 months

Improving economic conditions are driving continued improvement in the Melbourne CBD office leasing market with Savills latest research showing a significant lift in the September quarter over the previous 12 months.

According to Associate Director Research & Consultancy, Monica Mondkar, 363,592 square metres of space were leased in central Melbourne to September 30 (leases greater than 500sq m), which is up 79 percent on the previous corresponding period and 25 percent above the prior five year average of 289,330 square metres.

According to Deloitte Access Economics figures, the State’s economy is expected to grow at 2.8 percent in 2016/17, the highest amongst all Australian states and above the national average of 2.7 percent. Ms Mondkar said Victoria’s steady economic growth was the key driver while the lure of attractive new Docklands space accounted for significant churn within the market.

“Victoria’s economy continues to purr along nicely with the strongest population growth in the nation and a major projects program that is driving employment growth as well as office leasing with project management teams moving staff into the CBD.

“We expect this economic trend to continue with business optimism boosting growth in tenant demand, resulting in a higher level of leasing activity in the near term,” Ms Mondkar said.

According to Deloitte Access Economics figures, Melbourne CBD’s white collar employment grew by 11,600 workers from 2011 to 2016, and is forecast to rise by another 36,000 workers over the next five years, while Dun & Bradstreet’s Business Expectations Index increased to 17.8 for the fourth quarter of 2016, up from 12.3 in the previous quarter, and 9.9 above the 10-year average.

The research found backfill space, at 204,487 square metres – up 109 percent over the past year - accounted for 56 percent of the leasing activity.

Savills Director Office Leasing, Phillip Cullity, said with an uptick in enquiry in 2016 and the availability of new space at attractive rents, the rise in the overall leasing numbers was not surprising.

He said whilst significant tenant requirements remained in the market - current enquiry levels (above 500sq m) are at 237,400 square metres for the CBD and fringe markets – the outlook over the next 18 months was very positive.

“The market has definitely continued to improve over the course of 2016 and especially since the election and while we expect the dramatic rise in the leasing of backfill space to be tempered in the medium term by a gradual return to equilibrium in the market, the outlook is generally positive,” Mr Cullity said.

The Government and Community sector was the dominant tenant sector, leasing 32 percent of the stock, or 114,608 square metres over the 12 months, while Property and Business services was second accounting for 20 percent of the total office leasing activity.

Ms Mondkar said tenant demand over the next year was expected to be driven by the Healthcare, Finance & Insurance and Government sectors, which are forecast to grow at 6 percent, 5.4 percent and 4.1 percent respectively.

She said CBD rents now typically range from $450 to $600 a square metre for A Grade quality stock, and between $350 and $410 a square metre for secondary grade buildings. Rents delivered some growth with the average A Grade rent recording a 7 percent increase over the twelve month period.