Melbourne ‘a proper basket case’ as office vacancy hits 20pc
Melbourne’s CBD vacancy rate has hit 19.6 per cent, the highest since 1995, as a thinning pool of tenants switch into in efficient new towers on reduced footprints, leaving behind a generation of old, unloved and rapidly emptying hulks.
Sydney’s vacancy rate is also rising steadily, up more than a percentage point, quarter-on-quarter, to 15.6 per cent in the June quarter. A year ago, Melbourne’s vacancy rate was 16.2 per cent, according to JLL.
Perth’s vacancy is at 16.9 per cent, while Adelaide is at 16.6 per cent.
Weighing on the Melbourne market is a significant amount of new office tower supply, which was baked in before the market turned south.
The market recorded “negative net absorption” of 26,600 square metres – the size of medium-sized office building – meaning more space was left empty than freshly leased in the June quarter.
“While the headline Melbourne CBD numbers articulate tough market conditions, one positive is the significant reduction in sublease availability over 2024,” said Andrew Ballantyne, JLL’s research head for Australasia.
“Leasing enquiry has improved and the premium grade sector of the market recorded positive net absorption over the 2023/24 financial year.”
Two-tier market
Investor Shane Quinn, who chairs commercial property syndicator Quintessential, has made headlines in the past year, buying landmark towers in Sydney and Brisbane on prices significantly below their peak values.
While his firm is based in Melbourne, he describes the CBD market as “a proper basket case, and it’s going to be a basket case for the next five years”.
“I’m a value hunter and I don’t see anything that represents value to me,” he said.
“There is going to be a two-tier market – the haves and have-nots. Anything B-grade or less is a have-not. Anything A-grade, and really well-located, is a have.”
Steve Urwin, who runs tenant advocacy firm Kernel Property, with clients in Sydney and Melbourne, said the trend over the past year was firmly toward increasing vacancy in both cities.
“A current Sydney brief to market for one of our clients seeking over 1000 square metres received 177 options, far exceeding what we’d seen before in the market previously,” he told The Australian Financial Review.
“Melbourne is a one-way slope and hasn’t hit bottom. There is worse to come.”
Mr Urwin said there was a great divergence among his clients as to how frequently they require staff to occupy their office workplace.
“Are the Melbourne and Sydney trends at least in part as a result of commute distance? Perth and Brisbane continue to maintain much higher occupancy,” he said.
JLL tracks 4100 office buildings across Australia. About 15 per cent of those buildings have an occupancy rate below 70 per cent, but those buildings hold almost 60 per cent of total market vacancy.
“A proportion of these assets are becoming functionally obsolete and will be classified as structural vacancy,” Mr Ballantyne said.
Steer clear of B-grade buildings
In the past year, Quintessential has signed up investors in its unlisted syndicates backing a $250 million Brisbane tower, bought on a 17 per cent discount to peak value, and a $293 million Sydney CBD building, acquired on a 21 per cent discount.
But Mr Quinn said he was staying clear of B-grade buildings.
“No one wants B-grade any more. There are no businesses that can attract and retain staff and say: ‘Get yourself into a room with no natural light, no air-con, and walk up seven flights of stairs because the lifts barely work’.
“B-grade is not re-lettable. So don’t touch it. People say it’s cheap. Well, it’s not cheap, because it doesn’t have a function in the world.
“There is always opportunity. But don’t get fooled by buying something that just gets redundant.
“Old buildings will need to get knocked over and built again. They will need to get repurposed. People don’t want to live in a cave any more and those buildings are a cave”
