2020 Half Year Outlook - Melbourne Office Leasing

Posted on 04th September 2020

420 Collins St Melbourne 0062
Office Demand Evolving In New Landscape

Demand for office space will present itself in different ways during the COVID-19 pandemic and beyond, reflecting the enduring attraction of a workplace as a space for collaboration and interaction.

“As a result of the changing working and market environments, many companies are reassessing their office space utilisation,” Fitzroys Agency Associate, Stephen Land said.

“This is in response to observing the ability of staff to effectively work from home, and as a result they are generally now more open to flexible office arrangements moving forward.”

Land said there has been greater enquiry and activity within the CBD fringe and inner-suburban markets in recent months, with multiple factors at play.

“Tenants within the CBD or the immediate fringe, in locations such as Southbank, St Kilda Road, and Docklands, are considering moving their office closer to home, making it easier to access, particularly if time allocated to the office during the week is more flexible.

“Companies moving to the inner suburbs or metropolitan locations may seek to remain in the same amount of space, or perhaps even more to accommodate social distancing spaces, but are able to pay a more competitive rate per sqm than that of the CBD.”

He said enquiry for Hawthorn offices has increased for this reason, while some tenants wanting to remain in central locations have sought space in Fitzroy and Collingwood.

“This demonstrates that the concept of the office remains important for workers - that being able to have a devoted space away from home that allows for sharing ideas and social interaction is still desired, not just from an economic and production perspective, but a lifestyle perspective, too.”

Major completions increase CBD vacancy rates

New Property Council of Australia data shows Melbourne’s vacancy rate was 5.8% at the midway point of the year, up from a historical low of 3.2% at the beginning of 2020. The rise can be attributed an historically high introduction of stock to the market, although a large proportion of those new projects are pre-committed.

Major completions during 2020 have taken Melbourne, by some measurements, to now be Australia’s biggest CBD office market. Among the newly completed projects are:

Cbus Property and ISPT’s Collins Arch at 447 Collins Street

Mirvac and Suntec REIT’s Olderfleet building at 477 Collins Street

Cbus Property and Keppel REIT’s Victoria Police Centre at 311 Spencer Street

Two Melbourne Quarter, part of Lendlease’s Melbourne Quarter at 697 Collins Street

The new office tower within Dexus’s 80 Collins Street

130 Lonsdale Street, part of Charter Hall’s Wesley Place

Land said that we could see a shift of tenants within large high-rise towers looking to relocate to more social distancing-friendly buildings, or lower-rise boutique offices with less tenants. This could include larger office occupiers of circa 500sqm to 2,000sqm relocate from the CBD to a self-contained building or floorplate within the CBD fringe.

“However, there are tenants that are willing to take up office space across the CBD, who find the centralised location more beneficial for staff movement,” he said.

“Within our stock list, we are seeing most of our immediate activity being sub 500sqm, and there remains an ongoing desire within the market for boutique and character space.”

Fitzroys Agency Manager, Sam Friend said existing fit-outs are being highly sought-after in the current climate.

“Tenants are quite reluctant to take on their own fit-outs unless there are landlord contributions or incentives, or health incentives.”

He said tenants may be hesitant to commit to long-term leases with the current uncertainty, and there may be more two and three-year initial lease terms agreed to.

“There have been tenants not exercise their current lease options for further terms, whether it be two or five years, due to the uncertainty of the current market. They have in essence decided to stay on a month-to-month lease, extend for a shorter lease amount - say, six months - or decide to work from home until further notice.”

Land said that given the fluid nature of the COVID-19 situation, it is more likely terms will change throughout negotiations, and agents are needed to be as agile as anyone to understand the office market environment.

Sublease space up for grabs

“We are certainly starting to see more sublease and assignment space coming to the market,” Land said.

Available sublease space in the CBD has increased, but remains below historical levels.

“Subleasing part of an office could prove challenging as there may be some sensitivity with sharing a space in this current environment. It is likely offices would need to be altered so the subtenant has their own partitioned space, or the whole office is subleased or assigned to a single tenant.

Land and Friend recently negotiated an assignment of lease of 393sqm from Melbourne City Mission at 420 Collins Street to a specialist tech consulting company Data Agility at $181,125 per annum plus GST.

“The recently upgraded offices include existing workstations and chairs, desirable for a number of tenants currently looking to move offices with minimal work involved.”