Melbourne CBD Leasing Activity Picks Up In Post-COVID Environment

Posted on 13th April 2023

Walk the CBD

Melbourne’s CBD has sprung back to life, with retail tenants of all types making commitments to spaces in the city in anticipation of the ongoing return of workers to the office and amid a huge rebound in nightlife and weekend activity over spring and summer.

According to Fitzroys’ new Walk the CBD report, businesses both already based in the CBD and in the suburbs are becoming more active in enquiry and willing to commit to space heading into 2023.

The report, which details vacancy rates and tenancy breakdowns in the Melbourne CBD’s major retail strips and precincts, has been released just as Fitzroys’ CBD Leasing team has struck eight new retail leasing deals across the city to a mix of food and beverage, specialty and service tenants.

Eight new deals struck

Headlining the deals is a lease to Mörk, which expanded into the city two years ago – into a 7sqm lift shaft in Equitable Place – and has enjoyed ongoing success, prompting owners Kiril and Josephin to open a second CBD location at 13 Centre Place on a long 5+5-year deal.

Close by, fashion and streetwear retailer Underground Archive, which focuses on the secondary market for preloved designer goods, has chosen Flinders Lane to open its first physical store after being based online, building and trading to a loyal customer base for the past seven years. They’ll open at Shop 4, 237-239 Flinders Lane.

In Howey Place, Union Kiosk has seen fantastic success since it relocated and opened its doors in the laneway six months ago. As the business has grown and flourished, it became evident that a larger space was required, and so it has committed to moving into the larger adjacent property at number 12.

Also in Howey Place, bespoke garment maker Mr. Cuff has built a thriving business after opening up at number 6-8 through the City of Melbourne and Victorian Government’s Shopfront Activation Program, and has now signed a 2.5-year lease at $1,100 per sqm.

Another operator expanding within the CBD is Siam Botanical Massage, which currently trades within the Oaks Hotel on Collins Street, and has taken a 5+5-year lease at 122 Hardware Street, while Hunt Leather has moved from Little Collins Street, at the rear of the David Jones site, to the 271 Collins precinct on a 3+3+3-year term.

“There are multiple tenants with a successful track record of CBD trade that have witnessed the post-COVID rebound in CBD visitation for themselves, and have decided to invest further in the city and open new locations,” said Fitzroys’ Travis Keenan.

Meanwhile, two suburban operators will be opening up new stores in the CBD, on Makers Lane within the new NAB headquarters building at 405 Bourke Street.

Supernova Coffee, based on Glenferrie Road, Hawthorn, known for the Ninety Plus coffee and the Yuzo offering that is amongst the most expensive coffee in Melbourne and on earth – selling for $198 per cup – will be opening up, while South Yarra French patisserie La Yeahllow will serve their elegant cakes and desserts from a new flagship in the building.

“We’re seeing suburban traders making the considered move into the CBD. There’s clearly confidence that the workforce will continue to steadily return in 2023 and businesses are making commitments based on these expectations,” said James Lockwood.

Shift in activity during the week

“Weekday enquiry has picked up, particularly from Tuesdays to Thursdays, while City of Melbourne data showed weekend visitation rates heading into summer were actually higher than pre-pandemic 2019. Foot traffic generally in January is up 20% on pre-pandemic levels.”

“We’ve seen an increase in weekend visitation with numbers predominantly centralised around hospitality venues and event spaces.

“Working from-home-arrangements are here to stay, and as we’ve seen workers figure out gradually how they want to split their week between home and the workplace it has become apparent that Tuesday, Wednesday and Thursday are the busiest for daytime trade, while bars and restaurants continue to receive a boost on these nights.

Activity during Tuesday to Thursday continues to be stable; heading into summer, Melbourne’s average office occupancy lifted from 45% to 57% in November, according to the Property Council of Australia, driving trade both through the day and at night. Mondays are slowly starting to catch up and Fridays continue to be a designated work-from-home day across the board for CBD tenants, Lockwood said.

“Thursday has become the new Friday. These new patterns of movement have translated to increased bookings and activity amongst restaurants and bars in Thursday nights in particular as workers begin to wind-down from their week in the office. We’re then still seeing the typical influx of visitors on Friday nights and across the weekends,” he said.

Analysis by the City of Melbourne showed that Fridays and Saturdays have led the CBD recovery. There are more people visiting the city on weekends than prior to the lockdowns, lifting pedestrian activity between 9pm and 2am across the entire week to 97% of pre-COVID benchmarks, and more money spent on retail and dining, driving after-dark trade to be at or above 2019 levels consistently since April last year. Saturday spending between October and December was 120% of pre-pandemic levels. Weekdays show pedestrian movements at around three-quarters of 2019 levels, but economic activity has recovered more strongly as visitors spend more per person.

In 2022, nearly 130 new hospitality venues opened up in the city, comprising cafés, restaurants, and entertainment venues such as creative and performing arts sites, nightclubs and physical recreation sites. The activity represents a record for the hospitality sector in the CBD, according to Melbourne City Council.

“The recession of the 1990s was followed by innovation and new business activity. Small bars opened, laneways were activated and inner-city living took off. We’re seeing something similar now,” Lockwood said.

Lockwood said that fitted hospitality spaces remained by far the fastest-moving stock, but the attraction of the CBD to hospitality tenants was so great that demand had spilled over to operators willing to lease up specialty spaces and retrofit them with kitchen infrastructure. Some tenants have spent up to $1 million on fit-outs for these types of spaces.

“With COVID lockdowns and restrictions in the rearview mirror, we’re expecting office occupancy to lift steadily throughout 2023. That will have a positive effect on daytime trade, and will spill over further into night-time activity throughout the week.”

Melbourne City Council has said residential occupancy levels are now back to pre-COVID levels, while international students are making a return to the city as on-campus classes resume and international borders continue to re-open, particular in China. Beijing’s snap edict that the Chinese Ministry for Education would only acknowledge degrees awarded to students attending in-person classes – rather than online – suddenly means tens of thousands of Chinese students enrolled at universities across the country will need to arrive in Australia ahead of semester one to have their studies honoured. According to the Australian Government Department of Education, there were nearly 179,000 international students studying Victorian courses in 2022, and more than 46,000 were from China. Many of these were not in the country.

“The return of Chinese international students will be a major boost for the CBD. There has been a noticeable uptick in activity during day and night over the past year as students returned from around the world. China accounts for 25% of all international students enrolled in Victoria and we expect a further uplift in CBD activity across all hours in the coming months as a result of Beijing’s instructions,” Lockwood said.

Enquiry up, vacancies expected to come down

The face of Melbourne CBD retail has been through multiple phases since COVID and into 2023.

“Citywide, we’ve seen changes across the board from a tenant profile perspective,” Lockwood said.

“Over 2022, the first quarter saw an influx of specialty retailers take up leases in the CBD Core as clothing brands sought to redefine their in-store offering and take up central city positions. As we moved further out of restrictions mid-year, we noticed enquiry increase from hospitality operators with the overall long-term perspective from tenants become increasingly positive.” As evidenced by Fitzroys’ recent deals, suburban operators have been taking advantage of good opportunities.

“The CBD leasing market has been very positive so far this year, with an upbeat sentiment driving demand. Business confidence rose again in January and there is anticipation of growing office occupancy, tourist and student numbers in the Melbourne CBD.

“Food and beverage tenants are still making up the majority of the enquiry, but we have seen a larger influx of specialty and service retailers looking to expand into the CBD or relocate in to more prominent positions compared to this time last year.”

Major vacancies have emerged in Elizabeth Street and Swanston Street as landlords held back from meeting the market. Rents had gone up consistently in the CBD, and had no adjustments and fluctuations in the same way the suburbs had.

Service retail has seen a large drop as a proportion of enquiry amid the rise of food and beverage tenants and pubs, but existing businesses are seeing more customers come into the CBD for a haircut or to spend time at a beauty salon, perhaps get a coffee, and then go straight home, Lockwood said.

The CBD Core remained strong throughout 2022, with Fitzroys data showing vacancies in the broader block bound by La Trobe, Russell, Flinders, and Elizabeth Streets at 17.1%.

Fitzroys data includes all shopfronts within the designated precincts, including shops with ground-floor street frontage that are within shopping centres such as Emporium and St Collins Lane. Lockwood said some tenants have moved from shopping centre spaces to street-fronting space, including Bremont Watch Company, which moved from Collins Walk to a street-fronting space at St. Collins Lane.

The northern end around La Trobe Street has performed well, in line with the gradual return of university students to Melbourne University, RMIT, and other institutions, and the return of the international cohort that lives and studies in the area. La Trobe Street’s prime section vacancy is at a relatively low 9.1%, and this precinct is expected to be the most direct beneficiary of the rush return of Chinese international students in the coming months.

Also recording single-digit vacancies was the core of Flinders Street – from Elizabeth to Russell Street, immediately opposite Flinders Street train station and Federation Square – at just 5.4%.

The famed “Paris End” of the CBD – the east end of Collins Street - recorded by far the lowest vacancies of any precinct in the CBD at just 2.47%.

“The east end is still very popular for high-end retail and in particular hospitality operators. Both of these sectors have been remarkably resilient over the past three years,” Lockwood said.

“We’ve seen Aesop and Swarovski commit to stores, joining Gucci, Cartier and Hermes in the famous precinct.

Also within the east end precinct, Flinders Lane (13.25%) continues to thrive as a culinary destination. Grill Americano has recently joined the likes of Gimlet, Chin Chin, Supernormal and Garden State Hotel.

“We expect the east end to be particularly busy for hospitality tenants in 2023.”

The Western End of Collins Street (17.8%) is evolving with new developments coming out of the ground such as Charter Hall and GIC’s 555 Collins Street, which has attracted pre-commitments from Amazon and Aware Super. Also in the west of the CBD is Mirvac’s $1 billion dual-tower build-to-rent and office project at 7 Spencer Street and V-Leader’s $400 million future office tower at 600 Lonsdale Street, while The GPT Group recently completed its Queen & Collins project. Specialty tenants such as Cosentino have eyed off chances to activate the western core of the CBD, with Fitzroys leasing a Collins Street space to the international brand for a new showroom concept, while restaurant Freyja opened up and Italian artisan market is set to open this year, all looking to capitalise on the influx of office workers.

According to Melbourne City Council, some $2.5 billion worth of new development applications will be lodged in the CBD and surrounds in 2022 as developers and investors show their faith in the future of the city. Around 200 new development applications were lodged in the CBD.

Tenants optimising their space have included gaming giant EB Games, which moved from Swanston Street to Elizabeth Street (22.1%) in a deal struck by Fitzroys.

“We feel that moving into 2023, the overall sentiment will be positive within the CBD,” Lockwood said.