Melbourne CBD Office Market - 2020 and Beyond - Winter 2020 - Efront
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Melbourne CBD Office Market - 2020 and Beyond Winter 2020
New Developments Under Construction
Melbourne CBD is forecast to have
over 164,000 square metres of » COVID-19 presents potential issues to the supply
pipeline due to the delay of building materials from
» There are currently 12 developments under
construction, adding approximately 517,362 square
backfill space available over the China and other areas in Asia and project lockouts due
to a reduced number of workers on-site as per social
metres of office space within the next three years.
However, 87% of that area has already been pre-
next three years as a result of new distancing restrictions and future potential positive committed leaving only 67,928 square metres
COVID-19 cases. vacant. Three other developments are awaiting
developments coming online and pre-commitments within the CBD and a further four
developments are currently within the planning
pre-commitments into these new phase.
buildings. New Developments Construction Timeline
2020 2021 2022 2023
70,000
Tenant demand is expected to be 60,000
50,000
negatively impacted by COVID-19, 40,000
with tenant contractions, 30,000
20,000
business closures and increased 10,000
0
indecision from tenants likely to
result in increased vacancy and
reduced tenant demand in the
short term. Precommitted Vacant
The impacts of COVID-19 on Developments Under Construction (2020 - 2023)
tenant demand are expected to New NLA Pre- Vacant » Approximately 67,928 square metres of new vacant
place increased pressure on the (sqm) Committed
(sqm)
(sqm) space available over the next three years.
» When considering the amount of new space added
backfill vacancy with prolonged and pre-committed by year, there are only 29,928
square metres of vacant new space available in 2020.
2020 331,612 301,684 29,928
downtime periods.
2021 101,000 101,000 -
Obtaining pre-commitments for
new developments will be difficult
2022 33,000 11,000 22,000
due to the weakening tenant
2023 51,750 35,750 16,000 demand resulting from COVID-19
and increased availability of prime
Total 517,362 449,434 67,928 stock from the backfill vacancy,
leading to an undersupply in the
Source: m3property
medium term.
| Page 2 m3property 3
COVID-19 to weaken tenant
demand over the next 12- 18
months
Leasing Requirements
Backfill Space Available for Occupancy » According to the lease requirements listed on the
Property Daily commercial leasing news update over
2019 and 2020, there were more listings for spaces
Uncertainty for Tenants
Backfill Space Availability Timeline
35,000
under 3,000 square metres compared to any other Occupying under 3,000
space range.
30,000
2020 2021 2022 2023
» Number of active leasing requirements for space
square metres of office
25,000
required under 3,000 square metres contributed to space
approximately 58% of total number of enquiries, whilst
20,000 number of requirements for areas over 10,000 square
metres was only 8%.
15,000
» The total area by tenant enquiry for spaces between
10,000 1,000 to 3,000 square metres was 81,685 square
metres, whilst the total area by enquiry for spaces of
5,000 Leasing Requirement by Number of Listings
10,000 + square metres was 108,500 square metres.
0 » Even though the demand for spaces between 1,000 10,000+sqm
to 3,000 square metres contributed to over half of the 8%
6001-10,000sqm Under 1000
listings, they only make up 22.61% of the total area 25%
9%
required. This is a smaller proportion when compared
to total area required for 10,000+ square metres which
contributed 30.03%.
Source: m3property 3001-6000sqm
» Current Melbourne CBD tenants with active leasing
10%
requirements under 3,000 square metres reflects
Overall Vacant Space Availability 75,000 square metres.
» The total space currently occupied by tenants who » The impact of COVID-19 on leasing requirements is
have pre-committed to new developments under 100,000 far reaching due to the financial impact and resultant
91,041
construction to be completed over the next three years 90,000 indecision of tenants as well as social distancing
is approximately 263,842 square metres. Some of this 80,000 requirements within office buildings. Accordingly, we
66,350
space will be temporarily withdrawn for refurbishment 70,000 expect requirements for space less than 3,000 square
Area (sqm)
but all will become available for lease. 60,000 metres to be on hold for 12-18 months with a potential
50,000 44,640 1000-3000sqm
» Buildings with planned full refurbishments include increase in probability of tenants exercising options in 48%
40,000 32,551
18-38 Siddeley Street, 100 Queen Street, 150 Lonsdale existing premises.
30,000
Street and 500 Bourke Street. 20,000
Total Leasing Requirements (sqm)
» The total vacant space available for occupancy over the 10,000
next three years is approximately 234,582 square metres -
including new and backfill space. Only 32,551 square 2020 2021 2022 2023 10000+ 169,250
Backfill space available New development vacant space
metres is expected to be available in 2020 and 91,041
square metres available in 2021. 6001 - 10000 34,000
» One of the largest areas available for lease within a Source: m3property
single building will be at 600 Bourke Street with 24,911 3001 - 6000 24,550
square metres available for occupancy in 2022 across 14
floors. Another large portion of backfill space becoming 1001 - 3000 65,320
available will be 18,827 square metres at 101 Collins
Street currently occupied by Macquarie and Herbert
Under 1000 9,600
Smith Freehills.
- 50,000 100,000 150,000 200,000
Area Required (sqm)
Source: Property Daily and m3property
4 Melbourne CBD Office Market - 2020 and Beyond m3property 5
COVID-19 job losses to impact
Melbourne CBD vacancy
Leasing Requirements By Industry Category
Leasing Requirements by Number Leasing Requirements by Area (sqm)
Others
Technology Potential Impact of Job Losses on Melbourne CBD Vacancy
17% Technology Others 13%
15%
24% » To show the real impact on industries of the COVID-19 » m3property have analysed the total number of jobs in
Business crisis (without making changes to their labour force survey) Melbourne CBD as per the CLUE (Census of Land Use and
Resources Services the ABS in conjunction with the ATO’s single touch payroll Employment) provided by City of Melbourne.
4% 10% » We have thereafter applied job loss as a percentage by
system introduced new surveys, providing estimates for
Business Services
Education the total change in the number of jobs and how that has industry category for Victoria in order to calculate the
12%
5% evolved since Australia registered 100 confirmed cases of number of potential job losses in Melbourne CBD.
Resources Finance COVID-19 on 14th March 2020. » As per the analysis, Business Services and Finance &
Retail 5% 6%
» Each Victorian employment sector with the exclusion of Insurance are two industry categories accounting for
7%
Finance Education Health the Financial & Insurance Services sector saw a decline approximately 50% of Melbourne CBD jobs.
11% 6% 4% in employee jobs over the five weeks to 2 May 2020 » As per ABS data, Business Services for the period of 14
Government reflecting a total decrease of 7.3% nationally and an March to 2 May 2020 had the highest percentage of total
Retail
9% Health Legal decrease of 8.4% in Victoria. Although the Health Care and jobs lost accounting for approximately 7,292 jobs lost.
5%
Legal 10% Government 9% Social Assistance sector is impacted, it has seen one of the Current workspace space ratios for Business Services in
10% lowest rates of job decline compared to other industries Melbourne CBD is 17.36 square metres. This may result in
18%
over the period at -1.9%. The lowest job decline witnessed 126,570 square metres of sublease or backfill space.
» There were a total of 108 active enquiries listed on Property » In terms of total area required by industry category
was in the Financial and Insurance Services sector at 0%
Daily during 2019 and YTD 2020. The technology (15%) Government with 18% (68,744 square metres) and
and the highest decline was in the Accommodation and
and business services (12%) sectors make up the greatest Technology with 13% (51,834 square metres) makes up
Food Services sector at -28.4%.
proportion of total enquiries. the highest proportion of total leasing requirements in
Melbourne CBD.
70,000 8,000
Major Tenant Requirements Company Current Space
7,000
60,000
Total Jobs Lost Since Mar 24
Lease Required
Expiry (sqm) 6,000
50,000
» With upcoming leases expiring for firms such as the
Total # of Jobs
Commonwealth Department of Defence (2021), Dentsu 5,000
40,000
Aegis Network (2021), and VCAT (2022), many tenants Commonwealth Jun 2021 16,000- 20,000 4,000
are considering their future office accommodation Department of Defence 30,000
3,000
needs. These large firms are in the market for areas
20,000
ranging from 8,000 to 20,000 square metres within the Dentsu Aegis Network 2021 8,000-10,000 2,000
CBD which may pose a problem given the lack of large 10,000
(DAN) 1,000
space available.
» Work from home model / flexible work arrangements - -
Victorian Civil and July 2022 20,000
(excluding hot-desking) will continue into the
foreseeable future. This may have implications on Administrative Tribunal
future space requirements. (VCAT)
» Businesses that require their staff to work from the
office will require an increased amount of space in the EY Oct 2022 17,000
short term due to activity workspace fitouts no longer
being acceptable due to COVID-19 restrictions on office
Suncorp Jun 2023 15,000
buildings.
Australia Post 2024 30,000–40,000 Total number of Jobs Total job lost since March 14
Source: ABS, CLUE 2018 and m3property
Source: Property Daily and m3property
6 Melbourne CBD Office Market - 2020 and Beyond m3property 7
Melbourne CBD vacancy is
forecast to double by the end
of 2020 with a second peak in
vacancy occurring prior to the Conclusions
end of 2024.
• COVID-19 has resulted in increased indecision from tenants, with
the majority of tenant enquiries in the sub-3,000 square metres
space put on hold indefinitely. Coupled with this, the financial
Melbourne CBD Vacancy Forecast Scenarios
impact of COVID-19 to businesses is expected to further weaken
10.00% tenant demand in the short term. With the higher vacancy resulting
9.00% from increase in both backfill vacancy and sublease vacancy, the
8.00% availability of stock is expected to outweigh the demand in the
7.00% short term.
6.00%
Vacancy %
5.00%
• With weakening tenant demand and increased tenant
4.00%
indecision, new developments will have greater difficulty securing
3.00%
pre-commitments in the short term. This results in predicted
2.00%
undersupply in the medium term. The increased backfill vacancy
1.00%
0.00%
of prime stock is likely to be repositioned, increasing the difficulty
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
to secure pre-commitments.
Scenario 1 Scenario 2 Scenario 3
Source: m3property
» Given the uncertain economic conditions as a result of » Scenario 2 – based on the long-term average net • COVID-19 has resulted in a significant rise in unemployment. The
COVID–19, m3property have carried out an analysis of the absorption, m3property forecasts that vacancy will rise to
potential impact on the Melbourne CBD vacancy rate. We 6.73% by the end of 2020 and reach a second peak by the
Business Services sector, the second largest occupier of office
have developed three vacancy forecast scenarios for the end of 2024 at 7.83%.
space in the Melbourne CBD, has seen the biggest rise with a loss
Melbourne CBD office market by considering potential
variations in tenant demand, net absorption and potential » Scenario 3 – based on the previous downturn net of ~7,200 jobs since 14 March 2020. The expected conclusion of the
backfill space availability. absorption averages, m3property forecasts that vacancy
will continue to rise from end of 2020 (7.33%) and reach a JobKeeper stimulus in September 2020 will likely result in further
» Scenario 1 – based on the current economic forecasts peak of 9.50% by the end of 2024.
including white collar employment, m3property forecasts job losses, which in conjunction with backfill vacancy coming online
that vacancy will first peak at 6.51% by the end of 2021 and
reach a second peak by the end of 2024 at 6.90%. will significantly increase Melbourne CBD’s total vacancy rate.
8 Melbourne CBD Office Market - 2020 and Beyond m3property 9
Our Services
Commercial Valuation
The national commercial team advises clients
and prepares valuations of office assets in all
capital city CBDs and metropolitan markets
across the country.
Recognised as the leading independent consultant in the office sector, the team services the
institutional and funds management sector (both local and off shore), financiers, corporations,
private investors and government.
• Valuations for acquisition, asset reporting and mortgage security purposes
• Development feasibility advisory
• Rental assessments and determinations
• Advisory in respect of matters influencing property values
• Portfolio valuations
If you need any assistance please contact Melbourne Commercial team.
Gary Longden Niall Ashleigh Amita Mehra
Director Associate Director Research Director
+61 418 587 835 +61 467 293 866 +61 400 355 667
gary.longden@m3property.com.au niall.ashleigh@m3property.com.au amita.mehra@m3property.com.au
Nathan Sinni Peter Bath
Valuer Valuation Analyst
+61 3 9605 1019 +61 3 9605 1026
nathan.sinni@m3property.com.au peter.bath@m3property.com.au
m3property.com.au /m3property
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