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MAY 2012 MELBOURNE CBD Office Market Overview

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MAY 2012 MELBOURNE CBD Office Market Overview RESEARCH MMAAYY 22001122 MELBOURNE CBD Office Market Overview HIGHLIGHTS • In the absence of any major developments completed, total vacancy fell despite subdued tenant demand. However total vacancy is now anticipated to steadily increase over the next two years, peaking at 8.2% in January 2014 after which total vacancy is forecast to trend down. • Uncertainty in the financial markets in the wake of the global economy has dampened business confidence, impacting demand for CBD office space. After an initial recovery period of rental growth, the subdued labour market conditions have stalled face rents with upward pressure now on incentives. • Despite limited transactional activity, increased demand has resulted in a marginal tightening of core market yields. Increased offshore demand and renewed interest from private investors, coupled with the increasingly attractiveness of real estate yields should lead to further transactions. MAY 2012 MELBOURNE CBD Office Market Overview MELBOURNE CBD OVERVIEW Table 1 Melbourne CBD Office Market Indicators as at April 2012 Market Total Stock Vacancy Annual Net Annual Net Additions Average Net Average Average Core Market (m²) ^ Rate Absorption (m²) ^ Face Rent Incentive Yield (%)^ (m²)^ ($/m²) (%) (%) Prime 2,471,386 4.1 71,068 34,291 380 – 700 15 – 25 6.75 – 7.50 Secondary 1,627,739 7.0 -1,942 -16,975 260 – 400 18 – 20 7.50 – 8.75 Total 4,099,125 5.3 69,126 17,316 Source: Knight Frank ^ Property Council of Australia OMR SUPPLY & DEVELOPMENT ACTIVITY A mere 5,065 m² of office space was added to tenants. More than a third of the pre- will result in an additional 20,172m² being the Melbourne CBD office market in the six committed space has been leased by tenants added to the CBD legal precinct. Holding months to January 2012, the lowest half year migrating into the CBD from other office Redlich have pre-leased 28% of this space and will re-locate from their temporary total since July 2002, prior to the start of the markets. accommodation upon completion. last construction cycle. All of the space added Figure 1 to the CBD was through minor refurbishment Melbourne CBD Supply Docklands will continue to deliver the of existing stock. (m²) Supply (new & refurb) & commitment majority of new supply in the short term. In The confirmed pipeline of new developments 2013, Marsh Mercer and NAB are scheduled to 160,000 Forecast will ensure that this new construction cycle move into their new offices at Walker’s Collins 140,000 will extend through to at least 2014 as Square project and the Cbus development at 349,194m² of new office space is slated for 120,000 700 Bourke Street respectively. Charter Hall completion. With strong levels of pre-leases 100,000 and Cbus will jointly develop the Eastern anchoring new developments over the next 80,000 precinct’s first Premium graded tower in two years, just 72,288m² (or 28%) of space is 60,000 twenty years at 171 Collins Street, supplying yet to be committed. Historically, the 40,000 an additional 29,057m² of office space which Melbourne CBD office market has added 20,000 is due to be completed by mid 2013. The last approximately 3.7% of gross supply to the 0 office development delivered to the Eastern Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 stock base each year. Over 2012 and 2013 the Core was SX2 at 111 Bourke Street, completed market will add an average of 3.0% of gross in late 2009. Total Committed supply per annum. Source: Knight Frank/PCA Despite the high levels of pre-commitment, in In 2012, 129,137m² of new and refurbished addition to the new supply currently under office space is anticipated to be delivered to construction over the next three years, more The remaining 50,579m² of office space to be than 179,000m² of office backfill space within the market. Approximately 60% of this space constructed in 2012 will be located in the CBD the CBD will be vacated by tenants including will be constructed in the Docklands precinct. Core. Australand is expected to complete Improved amenity and access to large floor works on their speculative redevelopment at NAB, Telstra and BHP. There are also plates have contributed to attracting new 357 Collins Street by mid-year. A Core Collins emerging signs that large contiguous spaces tenants to pre-commit to new developments Street location has assisted the developer in are now being offered for sub-lease as a in the precinct. Of the 78,558m² of space securing several tenants to this building, result of the continued uncertain economic expected to be delivered in Docklands this leaving just 30% of space available. Juilliard conditions and soft labour market in Victoria. year, 80% has been taken by pre-lease Group’s redevelopment at 555 Bourke Street 2 www.knightfrank.com.au 357 Collins St # - 30,407 m² (Commonwealth Bank) 1 Australand - Q2 2012 - 70% committed. 2 990 Latrobe St - 12,200 m² (Melbourne Water) MAC (SA) - Q2 2012 - 100% committed. 3 3 Collins Square - 38,000 m² (ATO) Walker - Q2 2012 - 90% committed. 22 4 The Goods Shed - 12,518 m² (Pearson) Walker - Q2 2012 - 57% committed. 5 555 Bourke St # - 20,172 m² (Holding Redlich) 6 Juilliard - Q3 2012 - 28% committed. 6 850 Collins St * - 15,840 m² (Aurecon) Lend Lease - Q4 2012 - 60% committed. 720 Bourke St - 62,000 m² (NAB) 7 Cbus Property - Q2 2013 - 100% committed. 8 1 Collins Square - 35,000 m² (Marsh Mercer) Walker - Q2 2013 - 65% committed. 3 25 23 9 171 Collins St - 29,057 m² (BHP) 14 Charter Hall/Cbus - Q2 2013 - 50% committed. 26 2 13 8 10 150 Collins St - 20,000 m² (Westpac) 12 APN/Grocon - Q3 2014 - 72% committed. 4 7 11 313 Spencer St - 27,000 m² (Victoria Police) 29 Cbus/Aust Post - Q4 2014 - 100% committed. 12 740 Bourke St - 47,000 m² (Medibank) 29 20 Cbus Property - Q3 2014- 63% committed. 13 2 Collins Square - 50,000 m² 27 Walker - 2014+ 11 14 4 Collins Square - 20,000 m² Walker - 2014+ 15 b|e South - 27,000 m² Colonial First State - 2014+ 16 567 Collins St - 52,000 m² 16 APN/Leighton Properties - 2014+ 555 Swanson St (CUB Site) - 36,000 m² 17 Grocon - 2015+ Freshwater Place Stage 3 - 42,500 m² 18 Australand - 2015+ 5 82 Collins St - 38,000 m 19 ² Queensland Investment Corporation (QIC) - 2015+ 18 30 664 Collins St - 45,000 m² 20 Mirvac / Grocon - 2015+ 21 360 Collins St - 20,000m² DEXUS - 2015+ 395 Docklands Dve - 22,000 m² 22 1 21 MAB - 2015+ 28 23 1000 Latrobe St - 32,500 m² 15 Digital Harbour - 2015+ 24 180 Flinders St - 20,000m² DEXUS - 2015+ 685 Latrobe St - 33,000 m² 25 Charter Hall & Flagship - 2015+ North Wharf - 20,000m² 26 17 WTC Asset Management - 2015+ 27 601 Flinders St - 60,000 m² Eureka/Asset 1 - 2015+ 24 9 28 399 Bourke St - 63,000 m² 10 Brookfield - 2016+ 29 Sites 5B & 6B - 100,000 m² Lend Lease - 2016+ 30 447 Collins St - 80,000 m² ISPT - 2017+ 19 Under Construction DA Approved / Confirmed / Site Works Mooted / Early Feasibility NB. Dates are Knight Frank Research estimates Major tenant precommitment in brackets next to NLA # Major refurbishment Office NLA quoted * Sold to CIMB Trust (Nov-11) 3 MAY 2012 MELBOURNE CBD Office Market Overview The 5.3% total vacancy is made up of 4.6% on net absorption should be supported by TENANT a direct basis with sub-lease vacancy steady tenants such as Aurecon, Melbourne Water at 0.7%; however anecdotal reports indicate and Pearson migrating into the CBD. Whilst that it has increased significantly in the first annual net absorption is not expected to DEMAND & quarter of 2012 with an additional 80,000m2 match the levels recorded in the past four available for sub-lease, potentially increasing years, it is anticipated to remain positive in the sub-lease vacancy rate to 3.1%. the next two years as the absorption RENTS stemming from the new supply will outweigh As at January 2012, the office vacancy rate in the sublease and backfill. Adversely impacted by Victoria’s contracting the Docklands precinct sits at 0.8%; its labour market, declining business confidence lowest rate in six years. Strong tenant Anticipated Vacancy Levels and the financial market turmoil, tenant demand for office space within the Western Although the amount of un-committed new demand was soft over the second half of 2011. Core also resulted in vacancy falling in the supply currently under construction is not Weak tenant demand saw the Melbourne CBD precinct to 6.7%, its lowest rate since July 2 significant, easing business investment has record net absorption of 14,127m over the six 2009. months to January 2012, around a third of the led to tenant demand declining in the past six average over the past 10 years. Net Absorption months and is forecast to remain subdued for the next 12 months. A likely rise in sub-lease Despite the recent softness in activity, Over the past year, tenants seized the vacancy and an increase in backfill minimal new supply delivered to the market opportunity to upgrade their office accommodation will lead to a rise in vacancy in the second half of 2011 actually resulted in accommodation in the CBD, continuing the over the next 12 months. Total vacancy is the vacancy rate falling from 5.8% in July 2011 flight to quality trend witnessed in recent forecast to peak at 8.2% by January 2014 to 5.3% in January 2012.
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