Melbourne CBD office vacancy reaches record highs in over two decades

Headline vacancy hit 14.3% in Q1.

Demand remained subdued as CBD sublease vacancy continued to increase. Space handed back for sublease continued to increase this quarter totalling 64,260 sqm. This brings sublease vacancy to 4.0% (204,180 sqm) well above the long term average of 1.1%. However, there were some positive signs in the sublease environment with some tenants withdrawing and reabsorbing space they were previously marketing for sublease. 

The CBD pipeline remains strong, despite last year recording the largest completion total in 30-years. The most recent office project to commence construction was Charter Hall’s 555 Collins Street. This commencement came after securing Amazon (~15,000 sqm) as an anchor tenant. 

Investment activity picked up slightly over 1Q21, however volumes remain below average. The CBD recorded six transactions (≥ AUD 5.0 million) totalling AUD 335.0 million, showing a positive sign of investor confidence returning. The largest sale of the quarter was at 505 Little Collins Street, which Credit Suisse Asset Management sold to AEW Capital Management for AUD 154.0 million.

Prime gross effective rents decreased for a fourth consecutive quarter, as incentives continued to rise. CBD prime gross face rental growth was subdued and incentives continued to rise (33.8%), resulting in gross effective rents dropping 0.7% to average AUD 542 psm p.a. (-5.7% y-o-y).

Other key figures:

14.3% Vacancy: Melbourne’s CBD headline vacancy increased 1.1 ppts this quarter, to 14.3%. This is well above the 10-year average of 7.6% and the highest CBD vacancy rate since Q1 1999. This was a result of subdued occupier demand and on the back of an increase in new sublease space and tenant contractions.

-56,195sqm Net absorption: The Melbourne CBD recorded its fifth consecutive quarter of negative net absorption (-56,195 sqm) and well below the 10-year quarterly average (11,495 sqm). This also follows on from last year's result, which was the largest negative annual demand result on record (-188,775 sqm), however there are early signs of recovery. Demand remained subdued in most CBD markets nationally over the quarter, albeit at much lower levels than Melbourne. 

199,550 sqm Construction: There were no CBD office completions over 1Q21, after 2020 recorded the largest increase in new CBD stock since 1991 (328,900 sqm). There are currently five new projects under construction, expected to deliver a total of 199,550 sqm NLA by mid-2023 (68% pre-leased). There are an additional two full building refurbishments that are expected to bring back 60,720 sqm of stock to the market by 4Q22.

4.38-5.38% Yields: Both prime and secondary yields held steady for the third consecutive quarter on the back of limited transactional evidence. Yield ranges remain at 4.38%-5.38% and 4.75%-5.75%, respectively.