Warning of more pain for office sector in MelbourneNatalie...

Warning of more pain for office sector in MelbourneNatalie Craig, Property Reporter
April 23, 2009

OFFICE vacancy rates in Melbourne could reach double figures in six months, according to a market report.

Colliers International says vacancy grew from 5.5 per cent in September to 8.1 per cent by the end of last month.

And there is "more pain to come", according to Colliers' director Rob Joyes.

"Unfortunately it's looking like it will head to probably 10 per cent (vacancy)," he said.

A rash of speculatively built stock before the market crash in the early 1990s pushed Melbourne's vacancy rate as high as 25 per cent. "Spec building" has since gone out of vogue, but there will still be an issue this year with excess supply.

There has been no new construction in the past six to nine months, but the Colliers study shows 65,000 square metres of office space was added to the Melbourne market in the past six months. Only 33 per cent of this is occupied, and another 90,000 square metres will be added before the year's end.

Oddly, face, or advertised, rents have not fallen in line with the increased supply, and Colliers does not expect them to change in the next six months.

Behind the scenes, sweeteners such as complimentary fit-outs, rent-free periods, or rebates could mean rents were effectively about 10-15 per cent lower, Mr Joyes said.

Many tenants were taking advantage of the weaker market to improve their work spaces and fit-outs, but often decreased the space they took up through more efficient lay-outs.

Anthony Ludeman, who represents tenants for CBRE's corporate services wing, said incentives were now reducing face rents by as much as 25 per cent. He said they were used to help building owners maintain value and gain leverage in rent reviews. Companies "downsizing" was a major factor behind closed doors.

"Would you like to sublet some of your space and make a bit of a saving? Absolutely, is the answer you normally get," he said.

Most respondents in a survey by the Australian Property Institute said incentives had increased, with some saying they believed the discounts on offer were worth up to 30 per cent of face rents