Earlier this month, Morgan Stanley released detailed analysis pointing to a big ramp-up in office construction and office vacancy rates in Melbourne over the next couple of years.
Now Property Observer has published research from BIS Shrapnel showing Melbourne office vacancy rates on the rise, which could potentially lead to market “panic” from landlords:
The Melbourne CBD office market is moving increasingly in favour of tenants over landlords with BIS Shrapnel forecasting the vacancy rate to hit 10% by the end of the year.
BIS Shrapnel senior project manager Maria Lee expects the vacancy rate to remain at 10% over 2014 and warns there could be market “panic” from some landlords, not anticipating the size or duration of the downturn.
She warns existing investors and those entering the market now need to be prepared for a sustained period of challenging conditions and to plan their leasing strategies accordingly with cash preservation key.
However, a strong rebound is forecast in the second half of the decade with fundamental economic conditions driving the Victorian economy still in place.
But from now until sometime in 2015, the market is likely to get worse before it gets better pushing up leasing incentives and causing effective rents to retreat.
“This is a more severe setback, caused by weakness in the Victorian economy on several fronts,” Lee says.
Lee expects leasing incentives to rise further, to an average of 34 months’ rent free equivalent in the prime market.
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The Property Observer article also points to similar analysis from property valuers Propell, which points to rising supply and falling demand for office space:
Propell says falling demand combined with additional new supply will see the vacancy rate “rise considerably over the next couple of years”.
Around 129,000 square metres of new office space was added to the Melbourne market in 2012, but demand was for less than 40,000 square metres of new space last year.
Over the past five years, demand has averaged 60,000 square metre annually.
“The economic slowdown in Victoria is having its effect on the office market too, and while net absorption is still healthy, it is slowing,” says Propell.
“With the slowing of economic activity in Victoria, the reduction in net take-up and the amount of new construction, the outlook is for vacancy rates to increase over the next two years, with rents under downward pressure.
“Dwelling building activity is declining, there are severe cuts to public sector investment, and the high Australian dollar is taking its toll on manufacturing and some service industries,” she says.
It looks like Melbourne’s office market might be joining the high rise residential glut developing in and around the CBD.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
