This was published 7 years ago
Suburban office rents rise, vacancies fall: Knight Frank
City fringe office rents have soared 20 per cent over the past two years as tenants face diminishing choice of space.
Knight Frank research shows net absorption levels in Melbourne's suburban office sector were at a six-year high, with total vacancy falling from 7.7 to 7 per cent.
Melbourne's suburban office market has recorded positive net absorption for seven consecutive years.
Despite the trend over the past three years of major tenants upgrading to CBD office space, A-grade vacancy rates decreased to 9.1 per cent from a high point at the beginning of 2016.
"In contrast, secondary office vacancy levels increased with both B-grade and C-grade vacancy rates rising," Knight Frank's James Treloar said.
B-grade office vacancy rose to 6.9 per cent, while C-grade vacancy was up to 4.4 per cent.
City Fringe prime net face rents have increased up to 20 per cent over the past two years to reach a record high of $370 per square metre.
Average suburban A-grade net face rents increased by 8.3 per cent to $354 per square metre.
"With diminishing options in Melbourne's other office markets, Melbourne suburban office rents are projected to continue to increase," Mr Treloar said.
"The gross suburban office supply delivered over 2016 was 25 per cent below the 15-year average, however with limited vacancies within recently completed offices, speculative development levels have also risen," he said.
The outer eastern precinct accounted for 88 per cent of new suburban office supply, Knight Frank's Melbourne Suburban Office Overview said.
Agent Tim Grant said investment activity in Melbourne's suburban office market had reached an all-time high for a third consecutive year driven by domestic unlisted funds and syndicates.
With fewer city opportunities, investors were driving down suburban office yields to all-time lows, he said.
Investment sales activity (above $10 million) in 2016 within the suburban office market totalled $1.016 billion from 24 properties.
The volume of sales achieved in 2016 was 228 per cent higher than the long-term average.
Savills Australia research also points to yield compression and diminishing stock in the sector.
Foreign investors were a key driver purchasing nearly 49 per cent of the total $4.356 billion sold across the Brisbane, Melbourne and Sydney's North Shore markets.
Savills national head of research, Tony Crabb, said all indications were that both local and off-shore investor demand would deliver another year of outstanding growth in 2017.
"Perhaps the only factor that will see a fall in total spending over the next 12 months will be a shortage of properties for sale," he said.
"The frenetic nature of CBD investment markets over the last few years has resulted in severely depleted stock levels to the point where investors are being forced to consider other office markets and other property types including retail and industrial."
That will mean ongoing pressure on yields as investors chase fewer assets and fringe CBD market properties will come under increasing scrutiny, Mr Crabb said.