Struggling office stock creates two-tier market

Melbourne's metropolitan office market is putting on a "two-tier" performance with quality offices holding up well but secondary stock struggling, Colliers International reports.

Net absorption of quality suburban office space has moved into positive territory.

"Over the total market, net absorption turned around ...in March 2013, from -10,626 square metres in the six months to September 2012, to 16,481 sq m over the current reporting period," researcher Anneke Thompson said.

But secondary stock, particularly tenancies with no fitout, proved more difficult to lease. Much of the secondary stock on the market is located in the outer east where the vacancy rate increased from 7.87 per cent to 9.75 per cent.

The firm's H1 Metropolitan Office Market Research & Forecast Report suggests Melbourne's overall metropolitan office vacancy rate will peak at 8.03 per cent in the second half of 2013 as speculative stock in the outer east region is completed.

"Over 2014, we expect vacancy to trend down slightly, as most new supply will only be built with significant pre-commitment," the report said.

Some speculative supply would be absorbed before buildings were completed but it would result in extra secondary or older A-grade stock becoming available as backfill space, Colliers Melbourne east director Rob Joyes said.

"There is currently 77,000 sq m of existing supply in just the outer east region, however, there is only 15,200 sq m that represents A-grade quality," Mr Joyes said.

There were some attractive lease incentives being offered for secondary grade buildings, but top-tier tenants were opting for energy efficient buildings with well-designed floor layouts that improved office density and had a variety of staff amenities, he said.

While there was reasonably healthy institutional activity in the inner precincts, private investors and syndicates were still dominant buyers.

Unlike CBD markets, both private and institutional buyers were locally based, indicating that foreign investors were yet to be enticed.