Melbourne Commercial Market Focus

The headline vacancy numbers for Melbourne’s commercial market continue to underperform the other major capital cities, with latest Property Council of Australia (PCA) vacancy levels reported at 16.4%, compared to Sydney and Brisbane both sitting closer to 12%. These elevated rates, significantly higher than historic averages, illustrate the great challenge facing all cities and employers in the post-Covid era.

Landlord Strategies: Responding to High Vacancy Levels

Despite offering some of the most affordable accommodation costs among major capitals, Melbourne’s demand levels continue to demonstrate the same weakness observed through 2022 and 2023. In response, landlords have pulled all the commercial levers at their disposal. A surge of tenant-ready speculative fit outs targeting the smaller businesses has hit the market, while larger tenants can now command all-time high incentives in the region of 47% with plenty of anecdotal evidence suggesting higher levels.

While this demonstrates the eye-watering efforts being made by landlords to improve the situation, tenant demand has rarely materialised simply to take advantage of a good deal, and those owners with significant existing vacancy will be looking nervously at the 200,000sqm of additional new developments due to come online between 2025-2027.

Structural Changes on Melbourne's Commercial Office Space

The term “structural change” is something commentators have been reluctant to throw around, however after 18 months of negative net absorption, it is clear that employers in Melbourne have been adjusting their space requirements to meet a change in work practices, rather than battling to reimpose work practices that prop up traditional space requirements.

Industrial Sector Resilience

Beyond the office market, Melbourne’s industrial sector continues to match the performance of the sector nationally, with vacancy rates around 1.2% despite the first softening of tenant demand since 2020. Transport and logistics accounted for over 40% of the 2023 take-up underpinning the ecommerce as the great driving force of this sector.

Melbourne's Build-To-Rent Opportunity

Another strong story for Melbourne is the Build-To-Rent (BTR) sector, attracting significant investments from local and international players. Boasting 48% of Australia’s completed BTR stock, Melbourne cements its position as the prime market for large scale development opportunity.

Looking forward, institutional investors are increasingly focusing on the BTR sector, although potential taxation changes that could impact these investors are on the horizon. Nevertheless, BTR stands as a promising opportunity amidst the complexities of the Australian commercial real estate landscape.

Next month, we take a closer look at the Sydney market, exploring key highlights and trends shaping the commercial landscape in 2024.

Dermot Lowry
Group Executive Director - Commercial and Advisory
— Sydney Property Valuers - Corporate & Commercial
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