Melbourne CBD prime office rents dip 0.5% in Q1

Rents in fringe areas fell a further 1.1% in the same period.

According to a JLL report, CBD prime net effective rents (PNER) in Melbourne fell -0.5% over 1Q23 to now average AUD 352 per sqm per annum (-1.0% y-o-y). 

Fringe PNER fell a further -1.1% over the quarter to now average AUD 319 per sqm per annum (-0.8% y-o-y). PNER in the S.E.S fell -1.8% over the quarter to now average AUD 261 per sqm per annum (-2.9% y-o-y).

Here’s more from JLL:

Prime CBD yields softened 25 bps on the upper end to now range between 4.50%-5.75%. Prime Fringe yields softened 12.5 bps on the upper end and 25 bps on the lower end to now range between 5.00%-5.75%. In the S.E.S, prime yields softened 25 bps on the upper end to range between 5.25%-6.00%.

Minimal CBD demand as the metro market records negative absorption

The Melbourne CBD recorded a neutral net absorption result of 81 sqm in 1Q23. This was predominantly a result of the sub-1,000 sqm cohort contracting on their space requirements. CBD headline vacancy increased to 15.6%, the highest result since 1998. 

The Melbourne Fringe market recorded a weak net absorption result of about -16,300 sqm, as the attractive incentives within the CBD continued to attract tenants. The S.E.S recorded a similarly weak result of about -16,700 sqm over 1Q23. Headline vacancy increased in the Fringe (16.9%) and S.E.S (12.5%). 

Six project completions in the CBD and Fringe

Two projects reached completion in the CBD in 1Q23, with the delivery of 263 William Street (3,799 sqm) and 140 Lonsdale Street (22,750 sqm). Additionally, four projects completed in the Fringe, which delivered 54,200 sqm. The most notable completion was Victoria Place in East Melbourne (25,180 sqm). 

JLL is currently tracking 9 projects under construction (230,400 sqm) in the CBD, with a further 18 in the Fringe (174,100 sqm) and 5 in the S.E.S (58,400 sqm). Lendlease’s 69,500-sqm development at Melbourne Quarter in the CBD remains the largest project under construction throughout Melbourne’s office market.

Outlook: Weak pre-commitments to impact vacancy in 2023

The office market continues to be influenced by the sharp increase in the cash rate and the uncertainty which exists among businesses. Headline vacancy across all three office markets in Melbourne is likely to continue trending upward, as a result of the partially pre-committed supply pipeline in the CBD and Fringe. 

The rental market is expected to record subtle growth throughout 2023, largely driven by the stabilisation in the incentive level. Prime yields are forecast to continue softening as investors continue to place increasing pressure on pricing levels throughout the market. 

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