Office properties hot in demand in Melbourne CBD
Flight-to-quality and supply side issues driving competition in Australia’s hottest office market. Image: Canva.
  • The Melbourne metro market was the most in-demand in 2022, outpacing office deals in Sydney and Brisbane metro markets.
  • Businesses are partial to A-grade stock surrounded by high-quality amenities.
  • Supply challenges to remain gripping the market.

Office properties are firing in Melbourne, with office deals at an all-time high. Melbourne’s metro office market had 163,100 square metres (sqm) of office space leased out in 2022, surpassing their Sydney and Brisbane metro counterparts.

This year is looking to be another good one for Melbourne, with 70 deals already finalised in fringe and metro markets in the first five months, equivalent to 42,776 sqm of leased office space.

Tenants prizing amenities and lifestyle

Metropolitan areas around Melbourne’s Central Business District (CBD) have surged through 2023’s first quarter. Suburbs near the city’s periphery were especially desirable, with South Melbourne, South Yarra, and Collingwood appealing to top businesses and new talent.

Travis Myerscough, Colliers‘ National Director, says that the city’s fringe is appealing because it has abundant amenities near the office buildings, offering a vibrant environment for office workers.

“Amenity within and surrounding the office space has become more important than ever for businesses, as buildings and its office space are being utilised differently now compared to pre-pandemic, and we’re no longer just utilising the office and its surround between 9 am to 5 pm,” said Myerscough.

“With more flexibility offered to employees around working arrangements, offices in areas that are activated during many hours of the day have become more desirable.

“Tenants are also looking to upgrade their space and location, resulting in new buildings and quality A-grade stock being quickly absorbed in the city fringe, while we have seen a vacancy in lower grade buildings increase.”

Losers in the flight-to-quality

According to the Colliers Melbourne Metro Vacancy Report, vacancies for A-grade buildings have been dwindling in the metro markets, dropping from 16.5% in September 2022 to 12.9% in March 2023. On the other hand, B-grade vacancy has only dropped from 14.7% to 14.5% and C-grade vacancy has increased from 10.5% to 11.4%

The preference for A-grade premium office buildings is evidence of the flight to quality trend, where businesses are moving towards high-quality workplaces that are perceived to improve worker satisfaction and productivity at the expense of older office stock.

In the Melbourne metro office market, a staggering 100,000 sqm of new buildings 5,000 sqm and over are bound for completion, much of which has already been committed.

“Other than the one-off hit to demand which occurred over the six months to September 2020, due to Melbourne’s pandemic lockdown, healthy demand in every period since has absorbed a strong pipeline of supply,” says Jodi Birch, Colliers’ Associate Director of Research.

“With unemployment in Victoria low and growth of white-collar jobs above pre-pandemic levels, office demand is expected to strengthen as the flight to quality continues. This should see the majority of new or A-grade stock absorbed over the next 12 months, as tenants upgrade and leave “B” &” C” grade options and compete for the increasingly limited new and A-grade stock available on the market,” says Birch.

Demand and supply mismatch to remain the norm

Rob Joyes, Colliers’ Victorian State Chief Executive, opines that the pandemic restrictions and market uncertainty of the recent past have posed barriers to more projects starting. The shortfall of office stock will likely persist for the short and medium term, particularly in the city’s fringes.

“While there are several projects identified beyond 2024, many have not yet received development approval, and without a pre-commitment, they are either unlikely to proceed or unlikely to be delivered within the next five years,” Joyes says.

“Businesses looking to relocate and upgrade their space should probably consider doing that this year, as new supply will be limited next year, particularly in the city fringe.”

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