Melbourne C

SPRING 2014
www.m3property.com.au
Melbourne CBD
C
Office Market
MARKET TRENDS
 CBD tenant demand positive.
 New supply to remain below
average.
 Gross face rental growth subdued.
 Scope for further yield
compression due to the weight of
investment demand.
demand
 Incentives to remain elevated
before gradually declining.
The Melbourne CBD office market
experienced stronger demand,
demand modest
levels of new supply and continuing
withdrawals in the first half of 2014.
Melbourne was only one of two CBD
office market to record
d a decrease in the
vacancy rate over th
he period January
2014 to July 2014. Th
he Melbourne CBD
also recorded the high
ghest net absorption
p
of all capital cities in the
e first half of 2014.
IN THIS REPORT
IN THIS REPORT
Market Overview
Melbourne s CBD office market conditions have improved in 2014 with
Melbourne’s
market fundamentals strengthening. The CBD vacancy rate declined in
the first half of the year as net absorption increased, new supply
ong-term average levels and stock continued to be
remained below lo
withdrawn. Markett conditions are expected to continue improving into
2015.
1
Key Office Influences
2
Demand & Supply
3
Rental Market
6
Investment Market
7
Outlook
9
Office demand is likelly to improve over
the next six to twelve
e months. Various
forward indicators su
uggest continued,
improvement
in
although
gradual,
employment as the ec
conomy rebalances
to more diverse drivers of growth.
Below average new supply
s
levels over
the next 18 months wiill provide flexibility
to the market. Howeve
er, a robust level of
pre-commitments, tena
ant migration into
the CBD and continued
d stock withdrawals
should ensure market fundamentals
remain sound.
Investment activity remains strong and
yields tightened over the last six months
due to the weight of money flowing into
the Melbourne CBD office market. There
is scope for further yield compression in
2015.
Gross face rental growth has remained
relatively subdued but is expected to
strengthen,
g
, although
g
not significantly,
g
y,
over the next 12-18 months. Incentives
have largely peaked but will remain
elevated before gradually beginning to
decline in 2015.
628 Bourke Street, Melbourne
Sold
S
ld May
M 14 ffor $129
$129.6
6 million
illi
KEY INDICATORS – MELBOURNE CBD OFFICE MARKET
M
Stock (m2)
Vacancy (%)
Gross Face
rents ($/m2)
Outlook (1year)
Gross Incentives
(%)
Yields (%)
Outlook (1year)
CBD
4,327,508
8.5%
$350-$800
+2.00%
20-30
6.25%-8.00%
-15/25 bpts
Prime
2,724,873
6.7%
$500-$800
+2.00%
25-30
6.25%-7.00%
-25 bpts
Secondary*
1,602,635
11.6%
$350-$500
+2.00%
20-25
7.25%-8.00%
-15/25 bpts
Source: Property Council of Australia OMR (2014), m3property (October 2014
4). *Secondary is B Grade space only.
KEY OFFICE INFLUENC
CES
ECONOMIC GROWT
TH
Economic growth is forecast to
increase.
•
The rebalancing of the
t
Australian economy is underway away from mining and
resources to more diverse drivers of growth. The speed at which this transition
occurs will be a key driver of Melbourne CBD office demand.
•
The Victorian Deparrtment of Treasury and Finance (DTF) forecasts moderate,
although increasing, economic growth. DTF forecasts that the state’s output will
increase from 2.00% (in 2013-14) to 2.50% (2014-15). Output is forecast to increase
f th (2.75%)
further
(2 75%) in
i 2015-16
5 16 and
d beyond.
b
d
BUSINESS CONFID
DENCE AND CONDITIONS
•
The September 2014 National Australia Bank (NAB) Monthly Business Survey
suggests business co
onfidence declined in September 2014 to reach the lowest level
since the pre-election
n period. Business conditions declined again in September 2014
with
t tthe
e result
esu t co
consist
s stte
tentt ac
across
oss most
ost industries.
dust es
•
Various ongoing facto
ors have led to the softer result including weaker national income
growth (driven by fallling lower commodity prices), ongoing consumer cautiousness
and excess capacity.
Business confidence remains
challenged.
g
EMPLOYMENT
•
Forward labour markket indicators suggest unemployment will continue to gradually
decline. DTF forecas
sts the state’s unemployment rate will decline from 6.25% (in
2014-15) to 6.00% (20
015-16), 5.75% (2016-17) and 5.50% (2017-18).
•
White collar employm
ment is the key driver of office demand and includes a diverse
range of industries su
uch as Information, Media and & Telecommunications, Finance
and Insurance Servic
ces, Rental, Hiring Real Estate Services, Professional, Scientific
& Technical Servic
ces and Administration & Support Services and Public
Administration.
•
Annual growth in the
e State’s white collar employment has grown below trend in
recent years but ha
as improved recently. In particular, Victorian white collar
employment growth was
w robust in the year to August 2014 increasing by 5.0% (the
strongest rate of annual growth since the year ending May 2012). White collar
employment growth is
s expected to strengthen as economic growth improves.
•
Employment in Profe
essional, Scientific and Technical Services, the largest white
collar employment gro
oup, has trended sidewards recently.
•
However, employmen
nt in this sector is up over 25% since August 2008 and stronger
growth is expected.
Unemployment is forecast to
gradually decline.
Victorian white collar employment
growth was stronger in the year to
August 2014 and is expected to
strengthen as economic growth picks
up.
Employment (00
00s)
15%
10%
600
5%
400
0%
-5%
200
0
Annual Change (%)
No (000s)
-10%
-15%
15%
Employment Chang
ge (%)
Victtoria - White Collar Employment
800
Source: ABS, m3property Research.
R
www.m3property.com.au
Comm3ntary Spring 2014 | P2
SUPPLY, DEMAND AND VACANCY
STOCK AND SUPP
PLY
Melbourne CBD office stock totalled
over 4,327,500m2 with the Western
precinct accounting for the most
space.
•
urne CBD office market totalled over 4,327,500m2 as at July
Stock in the Melbou
accounted for over a third of all CBD office space (36%).
2014. The Western precinct
p
ourne CBD Office Stock by Precinct
Melbo
as at July 2014
Spencer
5%
Nth Eastern
8%
Flagstaff
8%
Civic
11%
Docklands
17%
Western
36%
Eastern
15%
Source: Property Councill of Australia OMR (2014), m3property Research.
pp y in the yyear to July
y 2014
Net supply
was negative.
New supply
pp y is expected
p
to total over
196,400m2 in the second half of 2014
and 2015.
•
Net supply in the year to July 2014 was negative (-21,548m2) driven by withdrawals
exceeding
total
(59,878m
di
t t l supply
l additions
dditi
(59 878 2 and
d 81,426m
81 426 2 respectively).
ti l ) Supply
S
l in
i
the first half of 2014 was driven by refurbished supply.
•
oderate supply levels over the next 18 months will provide some
Looking forward, mo
flexibility to the mark
ket. A significant proportion of space currently in the pipeline is
pre-committed which
h will limit vacancy increases in the short-term.
•
Recently completed and forthcoming new supply (new construction and partial
refurbishment) is ex
xpected to total over 196,400m2 in the second half of 2014 and
2015 Around
2015.
A
d 58,000
58 000
0 2 off new supply
0m
l is
i expected
t d in
i 2016 and
d beyond.
b
d
•
An additional 553,6
600m2 is also mooted including Telstra’s new office at 288
Exhibition Street.
•
The Victorian Goverrnment recently released an Expression of Interest for the 3.3
hectare Federation Square
S
East site. The Government is looking to develop the site
into a mixed use precinct with office, hotel and retail space.
•
ade total stock levels will continue to g
grow. However,, various
Over the next deca
factors suggest new annual supply levels will be lower than what has been observed
over the previous de
ecade.
•
These include withd
drawal of stock for residential conversions and other uses, a
generally weaker lea
asing environment (to constrain pre-commitments) and waning
interest for speculativ
ve development.
SELECTED MAJO
OR MELBOURNE CBD SUPPLY PROJECTS
NLA (m2)
Development
Stage
New Development
29,400
Construction
2015
New Development
55,000
Construction
699 Bourke Street
2015
New Development
19,000
Construction
562-574 Bourke Street
2015
Partial Refurb
12,224
Construction
Project Address
Completion
Construction
Year
Type
313 Spencer Street
2015
559-587 Collins Street
Source: Property Council of Australia (PCA) Office Market Report (OMR), m3property Research.
www.m3property.com.au
Comm3ntary Spring 2014 | P3
SUPPLY, DEMAND AND VACANCY
TENANT DEMAND
D
Net absorption was positive in the six
months to July 2014 with over
29,290m2 net absorption recorded.
•
Tenant demand in the
t
Melbourne CBD was positive in first half of 2014 with over
29,290m2 net absorp
ption recorded. Absorption levels were around long-term average
levels (since July 1990) and the strongest half year result since July 2012.
•
D also recorded the highest net absorption of all capital cities in
The Melbourne CBD
the first half of 2014.
•
p
stock was stronger in the period reaching over 19,900m2
Net absorption for prime
compared to around 9,380m
9 380m2 of secondary stock absorbed.
absorbed
•
This is consistent with the ‘flight to quality’ that has been observed in recent years
with tenants taking advantage
a
of weaker leasing conditions to move to better quality
space.
•
nditions is also resulting in non-CBD tenants migrating to the
Weaker leasing con
CBD.
Demand for prime stock continues to
be stronger than secondary space.
M
Melbourne
CBD Annual Net Absorption
250,000
Annual Net Absorption (m2)
200,000
150,000
100,000
50,000
0
-50,000
-100,000
Prime
Secondary
-150,000
Source: Property Council of Australia OMR (2014), m3property Research .
A Grade space has been most in
demand in recent years.
•
Absorption of A Grade space was strongest (net absorption of around 14,330m2 in
the six months to Ju
uly 2014), followed by C Grade (around 8,740m2) and Premium
Grade (around 5,570
0m2).
•
A Grade space has been most in demand in recent years averaging over 31,700m2
net absorption
p
per six month p
p
period since July
y 2011.
Melbourne CBD Office Net Absorption (6 Mths)
Total
Premium
A Grade
B Grade
C Grade
D Grade
Jul-11
54,999
7,280
55,926
1,468
-9,786
111
Jan-12
15,007
-7,796
15,658
6,982
1,833
-1,670
Jul-12
35 533
35,533
-4,540
4 540
43 477
43,477
-4,435
4 435
808
223
Jan-13
682
1,292
10,712
-1,903
-9,942
523
Jul-13
-3,655
8,833
63,729
-62,817
-12,612
-788
Jan-14
4,512
10,103
18,348
-26,885
2,974
-28
Jul-14
29,291
5,577
14,331
742
8,741
-100
Source: Property Council off Australia OMR (2014), m3property Research .
Net absorption is forecast to improve
in the short-medium term.
www.m3property.com.au
•
Looking forward, nett absorption is expected to improve in the short-medium term as
white collar employ
yment growth improves. This is consistent with a broader
improvement in the labour market and a reduction in the unemployment rate.
Comm3ntary Spring 2014 | P4
SUPPLY, DEMAND AND VACANCY
VACANCY
Melbourne was only one of two CBD
office market to record a decrease in
the vacancy rate in the first half of
2014.
Tenants have been taking advantage
of market pricing to move to better
quality stock.
Market balance will be maintained in
the medium term although backfill
space entering the market will
increase the vacancy rate
temporarily.
•
Melbourne was only
y one of two CBD office markets to record a decrease in the
vacancy rate (from 8.7%
8
to 8.5% over the period January 2014 to July 2014).
•
The CBD sub-lease vacancy rate increased slightly in the six months to July 2014 to
represent 0.8% of total stock (slightly above the long-term average rate).
•
Recent movements in the vacancy rate highlight ongoing market trends including
tenants taking advan
ntage of weaker leasing conditions and market pricing to move to
quality stock.
stock
•
s evident in the vacancy rate for B grade stock which reached
The latter factor was
13.9% (July 2014), the
t highest level since 1999, up from a recent low of 5.7% (July
2012).
•
e continues to be characterised by lower vacancy rates, for
Prime grade space
example 7.2% and 6.6%
6
for Premium and A grade space respectively (July 2014).
•
Market balance and vacancies will be largely maintained in the medium term driven
by improving tenant demand, below average levels off new supply, a relatively high
rate of pre-commitm
ments and continuing stock withdrawals (mostly of B grade
space).
•
kfill space will increase the vacancy rate, albeit temporarily, but
The re-entry of back
this will be tempered
d by the continued migration of tenants into the CBD.
Melbo
ourne CBD Office Vacancy by Grade
Vacanc
cy Rate (%)
16%
J
Jan-13
Jul-13
Jan-14
Jul-14
12%
8%
4%
0%
Source: Property Council of Australia OMR (2014)
(2014), m3property Research.
Research
Melbourne CBD Office: Total Vacancy Rate
30%
Vacancy Rate (%)
25%
L
Long-term
t
average
20%
15%
10%
5%
0%
Source: Property Council of
o Australia OMR (2014), m3property Research.
www.m3property.com.au
Comm3ntary Spring 2014 | P5
RENTAL MARKET
RENTAL GROWTH
H
Rental growth continues to remain
relatively subdued following recent
trends.
Traditionally rental growth has been
inversely related to the vacancy rate.
•
Prime and secondary gross face rents in the Melbourne CBD remained relatively
subdued over the 12
2 months to September 2014.
•
Improvement in renta
al growth is expected over the next nine to twelve months.
•
Prime gross face rents are expected to increase by around 2.00% over the year to
July 2015 before ren
ntal growth strengthens further (3.50% in the year to July 2016).
•
Melbourne’s rental g
growth in the short to medium term should be above the national
average with the Syd
dney CBD expected to achieve the strongest growth nationally.
•
Traditionally rental growth
g
has been inversely related to the vacancy rate. With the
overall vacancy rate
e expected to remain higher in the next few years (average of
8%+) compared to the last five to ten years (generally below 7%), rental growth will
constrained.
•
On a longer-term ba
asis a range of structural changes underway will influence rental
growth.
•
Changes which cou
uld negatively impact rental growth include ongoing business
caution (in part a legacy of the GFC/post-GFC periods and current low growth
environment).
•
Other changes inclu
ude Activity Based Working (ABW), a more subdued inflation
environment overall and new (or expanded) office precincts in central Melbourne.
•
The latter factor will be driven in part by the Victorian Government's plans to make
the expanded centra
al city Australia
Australia’s
s largest commercial and residential centre by
2040.
•
w
could positively impact rental growth include the ongoing
Structural changes which
shift to various ‘know
wledge’ sectors and the continued dominance of the CBD as a
white-collar employm
ment location.
•
Growth in other secto
ors could also positively impact rental growth.
•
For example, Victorria has continued to entrench its dominance in the overseas
education market an
nd this could increase demand for workers (and office space) in
the sector. Central Queensland University’s lease of 8,000 square metres at 120
Spencer Street is typ
pical of this transformation in demand currently underway in the
CBD.
•
on growth – and the associated pipeline of infrastructure
Continued populatio
investment – should also underpin demand for space from engineering, planning and
related firms.
INCENTIVES
Incentives will remain at elevated
levels for the rest of 2014 before
gradually declining in 2015
2015.
www.m3property.com.au
•
Gross incentives ha
ave trended upwards in recent years due to weaker market
conditions resulting in a decline in net effective rents.
•
e currently averaging around 27.5% and 22.5% for prime and
Gross incentives are
secondary stock resp
pectively.
•
Melbourne CBD inc
centives remain relatively high consistent with broader national
trends.
•
ely peaked and are expected to remain at elevated levels before
Incentives have large
gradually beginning to
t decline in mid to late 2015.
Comm3ntary Spring 2014 | P6
INVESTMENT MARKET
INVESTMENT MARKET
•
Sales activity (for sales
s
over $5 million) remains robust for the Melbourne CBD
reaching over $2.6 billon
b
(September 2014).
•
The robust result has
s already exceeded the high level of sales recorded in 2013.
•
Unlisted funds and foreign
f
investors account for the largest portion of sales in the
CBD accounting for most sales.
•
ange of trends will shape the CBD office investment market.
Looking forward a ra
•
First, institutional interest in the Melbourne CBD office market will remain as assets
offering both yield and
a exposure to resilient and growing economies are sought by
these investors.
•
eases are expected to be below levels observed recently thereby
Second, supply incre
limiting purchasing opportunities.
o
•
Third, the Melbourne
e CBD remains an increasingly popular investment destination
for overseas buyers seeking prime stock and exposure to the Australian real estate
market more broadly
y.
•
The investment mark
ket is evolving as shown by Asian investment now steadily being
joined by investmentt from North America and Europe.
•
Fourth as investors seek yield, but are limited by a lack of prime stock, they are
moving up the risk cu
urve and increasingly considering secondary assets.
•
This shift is also being driven by other factors such as continuing low interest rates
and
d development
d
l
t up
pside
id (especially
(
i ll for
f conversion
i into
i t residential
id ti l apartments).
t
t )
Sales activity remains robust.
Looking forward a range of trends will
shape the CBD office investment
market.
Melb
bourne CBD office sales volume
Sales volume
e ($millions)
3,000
2,500
2,000
1,500
,500
1,000
500
2006
2
2007
2008
2009
2010
2011
2012
2013
2014*
Source: m3property Resea
arch
*Office Sales over $5 millio
on to end September 2014.
www.m3property.com.au
Comm3ntary Spring 2014 | P7
INVESTMENT MARKET
Low interest rates,, combined with the
weight of money, continues to
underpin yield compression.
The divergence between rents and
yields present a moderate risk to the
market.
•
Prime yields tightene
ed by around 25 basis points over the 12 months to September
2014 to now range frrom 6.25% to 7.00%.
•
Secondary yields ov
ver the same period also compressed due to investors being
more willing to mo
ove up the risk curve and seeking residential development
opportunities.
•
Secondary yields now typically range from 7.25% to 8.00%.
•
The weight of money flowing into property is a factor affecting both prime and
secondary asset yield compression.
compression
•
There is scope for fu
urther yield compression over the next six to nine months given
the weight of money, continued low interest rates and improving economic growth.
•
b
rents (growing slowly)
The divergence between
compression) presen
nt a moderate risk to the market.
•
However, improving economic growth, continuing robust investment demand and
low lending rates sho
ould ensure these risks are minimised.
and
yields
(undergoing
Melbou
urne CBD prime and secondary yields
14%
Yields (%)
12%
10%
8%
6%
4%
2%
0%
Prrime
Se
econdary
Source: m3property Re
esearch
SELECTED MELB
BOURNE CBD OFFICE SALES
Property address
Date
Price
(millions)
Rate
$/m2
Market
yield
Purchaser
459 Little Collins
Sep 14
$45.5
$4,577
7.24%
Local private investor
700 Bourke St
Sep 14
$433.5
$6,765
5.74%^
AMP Capital
Wholesale Office
Fund
CBW (Corner Bourke and
d
William)*
Sep 14
$608.1
$7,470
6.48%
GPT (50%) & GPT
Wholesale Office
Fund (50%)
321 Exhibition St
Jul 14
$208.0
$6,866
6.70%
Invesco
555 Collins St
Jun 14
$78.0
$3,134
VP
Fragrance Group
50 Queen St
y 14
May
$40.7
,
$4,404
7.68%
European
p
Syndicate
y
628 Bourke St
May 14
$129.6
$5,252
7.33%
M&G Real Estate
Source: m3property Resea
arch. *Includes 181 William Street, 550 Bourke Street and Goldsbrough
Lane. VP = Vacant Posses
ssion. ^Effective Yield – Face = 6.40%.
www.m3property.com.au
Comm3ntary Spring 2014 | P8
m3property Research
For more information please
contact:
For more information please
contact:
Research Contacts
www.m3property.com.au
OUTLOOK
Jennifer Williams
The outlook for the Melbourne CBD office market is cautiously positive.
P 02 8234 8116
M 0400 116 343
Research Contact
Unemployme
ent Rate (%)
8.0
Unemployment Rate - Australia and
d Victoria
Aust
jennifer.williams@m3property.com.au
George Bougias
P 03 9605 1000
M 0422 266 131
Vic
george.bougias@m3property.com.au
6.0
Key Valuation Contacts
Andrew Duguid
Key Valuation Contacts
P 02 8234 8101
4.0
Gary Longden
P 0417
03 0605
M
3431000
772
M 0418 587 835
andrew.duguid@m3property.com.au
gary.longden@m3property.com.au
2.0
Don
Semken
Trent
Preece
0.0
2014-15(f)
2016-17(f)
2015-16(f)
Source: Commonwealth Treasury, Victorian Department of Treasury an
nd Finance, m3property
Research.
The outlook for the Melbourne CBD office
market remains cautiously positive with the
market now potentially having turned a corner.
New supply levels are expected to stay below
average levels in the short to medium term.
Moreover a sizeable proportion of new supply
Moreover,
in the pipeline is pre-committed and office
stock continues to be withdrawn.
Tenant demand is forecast to remain positive
as sentiment and the outlook for economic
growth and, importantly, white collar
employment growth also improves.
Growth
Gro
th in white
hite collar employment
emplo ment will
ill be
underpinned by an improving labour market,
the State’s unemployment rate declining and
the rebalancing of the Australian economy.
Vacancies are expected
e
to remain contained
by the continue
ed migration of firms into the
CBD, the removval of older secondary space
and improving demand.
d
The entry of some
backfill space will
w temporarily increase the
vacancy rate alth
hough not significantly so.
Gross face ren
ntal growth is expected to
strengthen over the next 12-24 months but to
remain relativelyy modest overall. Incentives
will remain at ele
evated levels before gradually
declining in 2015 due to improving
fundamentals.
Sales activity is forecast to remain robust with
both local and overseas
o
investors competing
for limited stock.. As a result there is scope for
moderate yield compression especially for
prime and betterr quality secondary stock.
in
nfo@m3property.com.au
OFFICES
038234
96058102
1000
PP02
M 0400 504 300
trent
trent.preece@m3property.com.au
preece@m3property
com au
M
0433
222 956
don.semken@m3property.com.au
Definitions
A-REIT: ASX listed Australian
Real Estate Investment Trust
Completion date: determined by
issue of a “Certificate of
Occupancy”
Grade: is determined using the
p “A Guide to Office
PCA report
Building Quality”.
Net absorption: is the change in
occupied stock within a market
over a specified period of time.
Net lettable area (NLA): defined
in accordance with the PCA
“Method of Measurement”
Adelaide
Brisbane
Melbourne
Level 3
44 Waymouth Street
Adelaide
South Australia 5000
T 61 (8) 8212 1755
F 61 (8) 8231 0286
Level 2
15 James Street
Fortitude Valley
Queensland 4006
T 61 (7) 3620 7900
F 61 (7) 3620 7999
Level 5
114 William Street
Melbourne
Victoria 3000
T 61 (3) 9605 1000
0
F 61 (3) 9670 1658
8
Perth
Sydney
Disclaimer
Secondary: Combination of
grades B, C and D.
Unit 2
168 Stirling Highway
Nedlands
Western Australia 6009
T 61 (8) 6500 3600
F 61 (8) 6500 3698
Level 14
1 Castlereagh Street
Sydney
New South Wales 2000
T 61 (2) 8234 8100
F 61 (2) 9232 5144
This report has been derrived, in part, from sources other than
m3property.
3
t In
I passing
i on
o this
thi iinformation,
f
ti
m3property
3
t makes
k no
representation that any in
nformation or assumption contained in this
material is accurate or co
omplete.
WALE: Weighted average lease
expiry.
To the extent that this ma
aterial contains any statement as to the
future, it is simply an estimate or opinion based on information
currently available to m3property and contains assumptions which
may be incorrect. m3pro
operty makes no representation that any
such statements are, or will
w be, accurate.
Pre commitment: contract
Pre-commitment:
signed to occupy space in new or
refurbished space prior to
construction commencing.
Prime: Combination of premium
and grade A.