Melbourne office rents set to surge: JLL

Melbourne office rents set to surge: JLL

15 March 2019

A new JLL report reveals Prime Melbourne office rents could surge 45 per cent to more than $850 a square metre in just a few years as developers chase an appropriate return on new projects, says the AFR.

Many current Melbourne CBD developments have switched from apartments to office projects, and these projects will likely require higher rental incomes to make them feasible, says JLL research director Annabel Macfarlane.

“In 2018, six CBD land sites transacted at an average of $51,000 per square metre, more than double the average rate of the previous five years,” she said.

“Five of the six transactions from 2018 are expected to proceed as office developments. The strong rate per square metre will require office net rents to be higher to support the feasibility of these future developments.

“JLL are predicting a base-case scenario which will require rents to increase by 14 to 45 per cent, with the top end of the CBD to be most affected.”

The JLL report estimates that if yields soften by 25 basis points and construction costs increase by 10 per cent then rents will need to be 26 to 56 per cent higher than existing prime grade precinct rents to make these projects feasible.

Knight Frank and Colliers International both report prime net face rents have increased by 12 per cent in the Sydney CBD over the past year and by 14 per cent in Melbourne’s CBD, at a time when more than $21.9 billion worth of office assets changed hands nationwide, notes The Age.

Colliers International’s managing director of capital markets, John Marasco, said the record sales volume is a 15 per cent increase on 2017 investment levels and an 84 per cent increase on the 10-year average.

Knight Frank’s head of research and consulting Australia, Ben Burston, said the markets are expected to see further growth, with Sydney rents forecast to grow by a further 7 per cent in 2019 and Melbourne by 9 per cent.

While JLL predicts modest office rental growth of 3.6 per cent a year in Victoria over the next decade, the firm said there could be significantly greater pressure on rents in sought-after prime locations such as Collins Street, which could bring forward the development of some key projects and set new price benchmarks.

These key projects include Charter Hall’s plans for a major office tower on the corner of King and Collins streets after sending $140 million to buy 555 Collins Street, a price equating to more than $62,000 a square metre.

On the corner of Queen and Bourke streets, Cbus Property recently spent about $170 million to create a near 3,000 square metre super site for a $1 billion office tower, a land rate of more than $56,000 a square metre.

Meanwhile, QIC Global Real Estate’s new $800 million tower at 80 Collins Street is already more than half full with pre-commitments, with space commanding rents from between around $750 to around $850, a 10 per cent rise in the last year.

With Melbourne CBD prime office rents currently averaging $590 per square metre, a 45 per cent increase would lift rents to $855 per square metre.

Melbourne’s current office vacancy rate is a record low of 3.2 per cent, well below Sydney’s vacancy rate of 4.1 per cent.