premium office demand keeps melbourne leasing strong
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  • Resilient demand seen across Melbourne city fringe and metro markets.
  • Stable tenant demand and reduced new supply next year is expected to keep vacancies low in the city fringe for the near future.
  • Net absorption for the city fringe was 42,000 sqm, while metro office was 4,000 sqm.

The Melbourne City Fringe and Metro Markets recorded 46,102 square metres (sqm) of net absorption for the first half of 2023, according to the latest from Knight Frank. Net absorption strengthened across the city fringe, recording some 42,000 sqm of net absorption, and the metro office market saw 4,000 sqm.

Vacancy rates have likewise improved, with the city fringe vacancies shifting from 11% in October last year to 9.7% in July this year; the metro rate rose slightly to 7.9%.

The strong results recorded across the first half of 2023 follow robust demand across the past few years, according to Knight Frank’s head of research and consulting Victoria, Dr Tony McGough.

“The bulk of the leasing activity in the first half of the year was carried out in Collingwood and South Melbourne, which continues to attract tenants due to the abundant retail amenities surrounding the office buildings and easy transport access,” he said.

“We saw strong demand for new stock as tenants continued to upgrade their space and location.”

Dr Tony McGough, Knight Frank

“200 Victoria Place achieved full commitment within three months of practical completion, highlighting confidence in the City Fringe office market.

“Meanwhile 11 Eastern Road, South Melbourne is now complete, with Levi’s committed to 1,000 sqm and a further 3,000 sqm under offer.

“In the metro office market, demand in the first half of the year started to rebound following a slowdown in 2022.

“However, in line with the economy as a whole, H2 2023 has quietened markedly compared to the start of the year.”

Net position at near neutral

The Outer East recorded nearly 23,000 sqm of net absorption, coming in as the strongest precinct for the first half of 2023, according to Dr McGough.

“Inner East demand also improved with around 2,100 sqm of net take up, but the South East and North West markets slowed, with negative net absorption, which has put the metro market’s net position at near neutral as we move into H2 2023.

“Compared to the CBD, the Metro area continues to benefit from its tenant client mix.

“While 2022 started off strong for financial services, with 56% of overall take up, space requirements fell back in this sector in 2023.

“However, public administration has filled the gap this year, and with health care, professional services and real estate all increasing their share of take up, with the latter rising from four per cent to 14%, the diversified base provides a small but steady amount of demand in the wider metro area.”

Supply pipeline for city fringe to slow next year

Knight Frank’s research found that the city fringe expects to see over 130,000 sqm of supply to be delivered this year, however, the supply pipeline is expected to slow down in 2024; the metro office market is not expecting many new developments.

“With tenant demand stable and reduced new supply expected to arrive next year, vacancy rates in the City Fringe are expected to remain low in the near future,” said Dr McGough.

“Overall there has been a tick up in vacancy rates metro wide to 7.9% but within a fairly tight band.”

“Going forward there are major projects lined up for early 2024, including One Middle Road (20,000 sqm) and 633 Springvale Road (8,600 sqm), which will put some pressure on the vacancy rates outlook in the metro area in the short term.”

Knight Frank research also found that net face rents have remained stable across the markets, however, incentives have risen again, leading effective rents lower.

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