Melbourne CBD office vacancy slips 0.2ppts to 14.8% in Q1

The city recorded negative net absorption during the quarter.

Melbourne CBD ended its positive streak of office space take-up for the past three consecutive quarters. The city recorded negative net absorption of 4,800 sqm in the first quarter of the year. 

JLL says subdued demand was largely on the back of continuing tenant contractions and new sublease space being brought to market. CBD vacancy fell 0.2 ppts over the quarter to sit at 14.8%, which was driven by office withdrawal activity.

Here’s more from JLL:

Both metro markets recorded positive net absorption over 1Q22. Fringe absorption (33,200 sqm) was a combined result of activity within new completions and reabsorbed sublease. The SES result (1,700 sqm) was largely on the back of positive relocation activity from large tenants. Vacancy increased 0.4 ppts in the Fringe to sit at 15.9% and declined 0.2 ppts in the SES to sit at 10.9%.

Supply pipeline remains stable in CBD and Fringe markets

No projects reached completion in both the CBD and SES over the quarter. The Fringe recorded four developments reaching completion over the quarter, delivering 52,800 sqm of new stock to the market, largely in the Yarra precinct.

The two largest fringe developments delivered the majority of new stock into the market, which included Industry Lanes at 459-471 Church Street (18,000 sqm) and 627 Chapel Street (14,500 sqm). Industry Lanes had pre-commitments of 12,000 sqm (66%), whilst 627 Chapel Street recorded 14,500 sqm (60%) of pre-commitments over the quarter.

Face rents increase as incentives remain steady

CBD prime net effective rents (PNER) marginally increased over the quarter to AUD 356 per sqm per annum, as face rents rose 1.0% and incentives remained steady at 38.5%. PNER increased 3.6% in the fringe to AUD 322 per sqm per annum and SES (0.63%) to AUD 269 per sqm per annum, on the back of stabilising incentives.

Melbourne CBD prime yields compressed by 13 basis points on the upper end to range between 4.25%-5.13%, as secondary CBD yields remained steady. The Fringe prime yields compressed by 13 basis point on the upper end to range between 4.50%-5.25%, with secondary yields remaining stable. SES prime yields remained stable as secondary yields compressed 25 basis points on the lower end to 5.00%-6.25%.

Outlook: CBD demand expected to improve throughout 2022

Leasing enquiry picked up towards the end of the first quarter which is a potential lead indicator of positive demand over the short term. Sublease vacancy remains elevated although is expected to trend downwards over the short term as the workforce gradually returns to the office.

Effective rents are expected to remain steady throughout 2022, as face rental growth continues, and incentives begin to moderate. Prime yields are forecast to remain steady in the short term, any movement in yields will be based on deal evidence in the market.

Note: Melbourne Office refers to Melbourne's CBD office market (all grades).