MELBOURNE is Australia's second-largest office market, and has remained relatively resilient since 2010.
A range of factors supported this, including … limited new supply and growth in absorption (driven by Australia's economic recovery during that period).
Underlying Strength
On the demand side in particular, the size and diversity of Melbourne's white-collar workforce was a key reason supporting the market's resilience, although on-going staff reductions in the finance and government sectors is lessening demand.
The Melbourne CBD office market was challenged through the first half of 2012. Although additional new supply was largely pre-committed, remnant back-fill space saw vacancies rise from 5.2% in January to 5.6% in June.
Despite some softening, CBD vacancy rates remain the second tightest nationally and below their long term average.
Subdued economic conditions are anticipated to continue challenging the sector with a softer labour market stalling rental growth and increasing sublease availability. Investor demand for CBD assets, including from international institutional investors, remains strong with constrained activity a function of limited supply rather than weak demand.
Vacancy Levels
Vacancies within the suburban office market have stabilized (currently at around 7.0%) having peaked at 8.0% through the GFC. Recent supply has been limited due to restrictive financing conditions, however new committed supply is emerging in the near-term around the inner east.
Diminished business confidence in the wake of continued economic uncertainty is impacting tenant demand. However, decentralization of large public sector users continues to buffer suburban markets.
Bottom Line: The Melbourne office sector will continue to be challenged in the near- term by domestic and international economic uncertainty.
And although the market is currently outperforming long term averages, anticipated softening in labour market conditions and lingering international economic downside risks may dampen short-term growth prospect.
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