Melbourne a tough market

MELBOURNE's office market remains the toughest in the country.

By InvestSMART · 10 Nov 2012

By InvestSMART ·
10 Nov 2012

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MELBOURNE's office market remains the toughest in the country.

While the city's office sector was showing mixed results, some retail developments were finding demand and residential conditions were stabilising, according to Merrill Lynch.

With 11 new city office developments under way, landlords' incentives to tenants have climbed by 10 per cent over the year to about 25 per cent, researchers from the bank said.

"There is a general consensus that we will see yield compression in office assets, but views differ on the extent (25-75 basis points) and time (12 months to three years)," the researchers said after conducting an extensive tour of all property asset classes in Australia's four largest capital cities.

Their view received qualified support from CBRE's third-quarter Australian Office Market View.

Melbourne's CBD vacancy rate, while low now compared with other capital cities, was expected to rise from 7 per cent to about 11 per cent over the next 12 to 18 months, it said.

"The impact of new supply in the Docklands is creating an issue with backfill space, in an environment where employment growth is easing," CBRE said.

Labour force figures released midweek show the unemployment rate held steady at 5.4 per cent in October while the participation rate fell from 65.2 per cent to 65.1 per cent.

Subleased space had also increased to about 70,000 square metres of available area, with the ANZ putting nearly half of that, 27,000 sq m, on the market at 55 Collins Street.

While the St Kilda Road precinct has attracted several smaller to medium-sized tenants in the first half of this year, that demand was starting to wane, CBRE said.

Investor activity was also slowing and the strong performance in both prime and secondary yields, a key differentiator for Melbourne over the past few years, was stabilising.

According to Merrill Lynch, other property asset classes were showing resilience.

Retail malls with strong local market positioning continue to attract good demand.

Chadstone's luxury precinct was trading well enough for retailers to want to double their space in the forthcoming Stage 35 redevelopment, the researchers said.

Westfield management saw Plenty Valley as a key opportunity in a growth corridor that was about 20 years behind Fountain Gate in development terms, they said.

Stockland Highlands had shifted focus from first home buyers to upgraders but "overall volumes" remained subdued because of competition from nearby developments.

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Frequently Asked Questions about this Article…

What is the current state of the Melbourne office market for property investors?

Melbourne's office market is described as the toughest in Australia. Research from Merrill Lynch and CBRE notes 11 new city office developments underway, rising landlord incentives and a softening demand environment, particularly with new supply in Docklands creating backfill pressure.

How have landlord incentives changed in Melbourne offices and what does that mean for tenants?

Landlord incentives in Melbourne offices have climbed by about 10% over the year to roughly 25%. That means tenants are receiving larger incentives (rent-free periods, fit-out contributions, etc.), which reflects landlords competing to attract or retain tenants amid rising supply.

Are vacancy rates in the Melbourne CBD expected to rise, and by how much?

Yes. CBRE expected the Melbourne CBD vacancy rate to rise from around 7% to about 11% over the next 12 to 18 months, largely driven by new supply (notably in the Docklands) and easing employment growth that reduces demand for office space.

How much subleased office space is on the market in Melbourne and who is contributing to it?

Subleased space has increased to about 70,000 square metres in Melbourne. Nearly half of that comes from ANZ, which put about 27,000 sqm on the market at 55 Collins Street. Rising sublease availability adds to overall office supply and can put downward pressure on leasing markets.

What are analysts saying about commercial property yields in Melbourne?

Merrill Lynch researchers report a general consensus that office yields will compress, with estimates varying from 25 to 75 basis points and timing from 12 months to three years. CBRE also noted that strong yield performance in prime and secondary assets appears to be stabilising as investor activity slows.

How are Melbourne retail malls and residential developments performing compared with offices?

Retail malls with strong local market positioning remain resilient and continue to attract demand. For example, Chadstone's luxury precinct is trading well enough that retailers are considering doubling space in the Stage 3 redevelopment. Westfield sees Plenty Valley as a key opportunity in a growth corridor. Residential conditions were reported as stabilising, though some projects like Stockland Highlands are seeing subdued volumes and shifting focus from first-home buyers to upgraders.

Why do labour force figures matter to Melbourne property investors?

Labour force data influences office demand. The article notes unemployment held at 5.4% in October while the participation rate fell slightly from 65.2% to 65.1%. Easing employment growth was cited as a factor reducing demand and contributing to backfill issues as new office supply comes onstream.

What key factors should everyday investors watch in the Melbourne property market over the next 12–36 months?

Investors should monitor new office supply (including the 11 developments underway), CBD vacancy trends (expected rise toward 11%), sublease volumes (eg, ANZ's 27,000 sqm at 55 Collins Street), potential yield compression (estimated 25–75 basis points over 12 months to three years), retail performance at centres like Chadstone and Plenty Valley, and broader employment indicators that affect leasing demand.