Docklands threat to CBD

Docklands poses a clear risk to the central business district's office vacancy rate, CBRE research suggests.

Harbourside development on the western edge of the city has been the engine room for growth in Melbourne's CBD for the past decade and will continue that role over the next two years, according to CBRE's latest Australian Viewpoint.

But while much of that growth in stock has been absorbed against strong background conditions in the office occupier market, "forthcoming supply in Docklands poses clear risks to CBD vacancy", it said.

To date, the market appeared to have digested the extra space as part of a cyclical "slowing" after a period of strength.

But the significant level of development within Docklands over the next 12 months is "expected to outstrip demand", CBRE maintains.

Tenants in the CBD's traditional core - mainly finance, banking and government sectors - are continuing to consolidate space with activity-based working.

"This leads us to question how vacancy, driven through tenant relocations to the Docklands precinct, will be absorbed over the next 12 to 18 months," CBRE said.

Jones Lang LaSalle leasing director Ashley Buller said Docklands was attracting bigger corporate tenants such as ANZ because of its campus-style office buildings.

One consequence of the west-end development, was a geographic "re-weighting" of the office market, Mr Buller said.

While the eastern end of the city still maintained a premium, it was now having to be more competitive with incentives on leases.

"From a tenant point of view, it's a great opportunity to upgrade with extremely attractive terms," he said.

Prime tenants would continue to gravitate towards Docklands, CBRE said.

The next round of large tenant relocations is expected to leave about 90,000 square metres of backfill space in the CBD.

The "base case" forecast shows vacancy peaking in July 2014 at 10.3 per cent based on an annual net absorption of 33,000 square metres over the next five years, according to CBRE.

A worst-case scenario shows vacancy peaking at 13 per cent in July 2016, it warned.

Melbourne's premium office yields had compressed materially compared with Sydney's between 2009 and 2011.