Pandemic halts office dream run

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FIVE years of rental gains across Melbourne’s city fringe office market are tipped to be wiped out by the end of next year as more than 300,000 sqm of stock brought online during the coronavirus pandemic pushes up vacancies.

The market has recorded rental growth in prime and secondary assets, in some cases outperforming CBD markets nationally, but according JLL projects supply, withdrawals and likely demand will lift vacancies to 13.7% at the close of 2021 before a second peak in 2024 at 14.3%.

New supply to the in 2020 is expected to be more than nine times the 20-year average, and by the end of 2024 a net increase in stock of close to 305,300 sqm will take the total market to 1.87 million sqm.

The March quarter represented the peak of the net face rental growth cycle across the fringe, including the Richmond, Cremorne, St Kilda Rd and South Melbourne, markets, and the impact of the coronavirus crisis on vacancy is still to be determined. However, as vacancy increases, effective rents in older and secondary stock will record more pronounced corrections.

JLL is tracking 55 projects of over 1,000 sqm that could deliver an additional 272,700 sqm of office space to the market by 2024, but believes many of these are unlikely to proceed without pre-commitment and therefore may be deferred or put on hold.

Several factors will impact the variance in predicted vacancy scenarios. A V shaped recovery assumes the supply pipeline is more substantially reduced or delayed and demand bounces back strongly in 2022, with a peaks in 2023 of about 12.8%, while a longer term impact assumes a reduced or delayed supply pipeline but also continuing inactivity for the next four years, minimal withdrawal of assets for any type of development and weaker demand. In this instance, vacancy could hit about 15.4% in 2022.

JLL’s senior research director – Victoria, Annabel McFarlane said COVID-19 is expected to have a short to medium term impact on the Melbourne fringe markets.

“After five years of very strong rental growth with prime net effective rents increasing by 9.2% on average annually, we are projecting that net effective rents will contract by 9.1% from the peak in 1Q20 to trough in 4Q21.

“As demand softens, developers may postpone or place projects without any level of pre-commitment on hold as softening rents and yields impact the long-term viability of these projects. Shorter build periods and smaller project sizes gives the fringe market a degree nimbleness as potential speculative supply is postponed in response to reduced demand.

“Office markets will need to become more metropolitan to accommodate the changing and growing workforce.”

Some sectors will expand after the pandemic that will particularly affect the fringe market given the occupier range. Technology, health care and public services, all predicted to expand and with strong footholds within the fringe markets, and these precincts are well placed to absorb these rapidly growing sectors in the recovery.

McFarlane said Melbourne is well positioned from a macroeconomic stance, with liveability, relative affordability, historic population and jobs growth and a strong education sector to support the recovery from this health and economic crisis.