Melbourne vacancy rates hit 20-year high as demand hits record low

Melbourne CBD’s office vacancy rate has hit its highest level since January 2000 as the city continues to feel the impact of repeated lockdowns.

The Property Council of Australia’s Office Market Report for the 6 months to July 2021 also found demand in Melbourne’s CBD was at its lowest level on record, eclipsing the 1990s recession.

Vacancies in the CBD increased to 10.4% over the past six months, a 2% increase on the previous period, and the highest vacancy rate the city has recorded since January 2000.

St Kilda Road (16.3%) and Southbank (15.2%) have also had vacancy increases over the past six months.

The increase in Melbourne office vacancy was largely due to reduced demand, with tenants handing back space contributing to a net absorption of 96,635sqm of used office space in the CBD.

Melbourne was the only CBD in Australia to experience negative demand over the last six months, with demand now at its lowest level on record, surpassing previous the lowest in July 1996. All other capital cities, with the exception of Sydney, enjoyed decreases in office vacancy over the past six months.

Victorian Executive Director of the Property Council of Australia Danni Hunter said: “Every lockdown is a step backwards for Melbourne and particularly our CBD and there is residual uncertainty about the future with more supply coming online over the next six months.

“These numbers and declining office occupancy reinforce the urgent need for a plan to revitalise our CBD and ensure Melbourne continues to be a place to live, work and invest.

“We need the Victorian Government to come to the table with a plan to get people back to the city and encourage investment in our CBD. This includes a hybrid working model that enables people to work from home and the office, a stimulus package targeted at preserving CBD businesses, and an aggressive attraction strategy for national and global headquarters to locate in Melbourne’s CBD.

Melbourne also saw a significant increase in its sublease vacancy rate in the CBD, almost doubling to just under 120,000sqm.

“The cycle of lockdowns has clearly shocked business confidence and seen the rapid rise of subleasing vacancies as people stay away from the CBD and small business and retail suffers,” Ms Hunter said.

Melbourne’s CBD saw negative net supply with 13,219sqm of supply additions over the period and 13,450sqm of withdrawals. This is in stark contrast to the year to January 2021, which saw more than 350,000sqm of office space added to the market in 2020. However, Melbourne is set to deliver over half of new office space in Australia over the next six months, with 222,000sqm of new stock entering the market in the second half of 2021.

Negative demand was concentrated in A Grade office space, with a net absorption of -84,540sqm over the measured period, leaving Melbourne with more negative demand for prime stock than secondary stock. Conversely, every other capital city recorded higher vacancy in secondary over prime stock.

The Property Council of Australia’s Office Market Report can be found here.

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