THE Melbourne CBD office vacancy rate is forecast to remain above 10% over the next four years, despite a benign supply pipeline.
Speaking at the Australian Property Institute and Real Estate Institute of Victoria State of the Market conference, Jones Lang LaSalle Victorian head of valuations and advisory Martin Reynold said the vacancy rate will remain above 10% for the next four years, which is the longest period since the 1990s.
Reynolds said the CBD vacancy rate is currently at 11% and he predicts it would eventually peak at 11.6% by 2015.
According to JLL, the total CBD office market stock is 4,416,326 sqm, of which 2,602,114 sqm are prime space in 86 assets. The vacancy rate for prime remains well below 10%, whereas the vacancy rate for secondary stock is nudging close to the 15% mark.
Melbourne’s prime vacancy rate is lower than Sydney (12.08%), Brisbane (10.6%) and Perth (10.1%).
Reynolds said the current market provides a compelling argument for businesses to relocate to superior premises in the current environment.
Reynolds said the demand environment remains challenging over the next 18 months and that weaker outlook has shot landlord’s confidence, which is reflected in the high levels of incentives being offered to tenants.
JLL’s Landlord Misery Index shows incentive levels climbed tipped over 40% in 2013 – which the highest level since 1997.
There is good and bad news, on the bright side, Reynolds said incentives have stabilised and he predicts it will trend downward in the CBD, fringe and St Kilda Rd markets.
The bad news, Reynolds said the office market is undergoing structural change and incentives will remain higher for a longer period of time.
One such change is a closer alignment with Sydney market. Reynolds explained that Sydney-based investors now own a higher concentration of Melbourne office assets and they are accustomed to higher incentives in Sydney, where the levels have typically been higher than Melbourne.
In the CBD, incentives are expected to remain stabilise around 35% over next two years to 2015, declining to 28% in 2016 and around 26% in 2017. In the fringe, incentives will be around 26% in 2014, 25% over the two-year period of 2015/16 and fall below 25% in 2017.
St Kilda Rd incentives will sit at 25% over 2014, before hovering around 20-25% over the three years to 2017. Finally, the south eastern suburbs will see incentives stay unchanged at 15% over the next four years.
As a result, effective rentals will remain subdued during 2014 and could come under further pressure if incentives rise further. JLL currently forecasts prime net face rents will increase from $400 to $410 per sqm, representing a 2.5% growth.
Fortunately, for Melbourne the benign supply pipeline should help ensure a soft landing, with less than 4% in 2015 – in contrast to Perth and Brisbane around 9-10% of total stock.
In the event of a market upswing in 2014, the CBD vacancy rate could tighten and fall to 6.9% in 2016 and prime net effective rents would rise by an average of 6% p.a. between 2013 and 2016.
So far, Reynolds said there are signs that demand in 2014 could be stronger than initially thought. CBD net absorption is forecast to total 15,000 sqm – but it could be stronger.
“We are aware of two leasing transactions that would account for approximately 20,000 sqm of net absorption,” Reynolds said.
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