How would you characterise your market at the moment?
The Melbourne CBD leasing market is ‘operating under a cloud’. Tenants continue to behave cautiously by delaying real estate decisions. They are motivated around outcomes that deliver operational efficiencies and by consequence, cost savings. These outcomes have seen the re-emergence of sublease space with the largest area (11,000 sqm) being offered by AXA/AMP at 750 Collins Street.

Are there any trends you are noticing among the tenants you are talking to?
The catalyst for leasing enquiry continues to be either lease expiry or expiry of further term option dates. As a result, tenants are often entering the market with minimal time to assess alternatives and make property decisions. The ‘stay put and renew short term’ outcome continues to be highly favoured. We expect this trend to continue throughout the balance of 2012.

What do you think will be the biggest influence on your market in Q2?
Currently, the four greatest market issues that are anticipated to affect the office market during 2012 are:

1. The rise in building outgoings resulting from the anticipated substantial increase in building energy costs;
2. An increased focus on NABERS performance (intrinsically tied to the earlier point) and the push by the government to leave outperforming buildings that do not meet their minimum 4.5-star benchmarks (noting that these moves have been touted to occur well before their actual lease expiries);
3. The markets focus on ‘end of trip’ facilities – now an essential building amenity that forms a critical part of a tenant’s shortlisting assessment tool; and
4. Activity Based Workplace (ABW) strategies that deliver operational efficiencies and result in tenants requiring a smaller tenancy footprint (creating additional sublease supply).

What will rents and incentives do in Q2?
Asking rents in Melbourne were increased in early-2011 to capture the anticipated rental growth expected throughout 2011. With this not eventuating, asking rents are currently under review across most CBD buildings. We expect this may result in asking rent being reported at levels closer to deal rent. Incentives increased slightly in late-2011. We expect the current levels for moving tenants (circa 20% net lease value) to continue until at least 1H12.

What should landlords do to adapt to these market conditions?
Be patient and target businesses that can afford to meet higher occupancy costs. Assess tenant demand and be sensitive to their operational needs and focus on efficiency.

Stuart Colquhoun
Head of Leasing, Victoria
stuart.colquhoun@ap.jll.com

Recent Leasing Deals

• Tertiary Education Quality Standard Board has leased 2,245 sqm at 530 Collins St, Melbourne.
• Under offer – 11,000 sqm AMP/AXA subleased to Department of Transport at 750 Collins St, Docklands.
• Vision leased 2,900 sqm at 357 Collins Street, Melbourne.
• Treasury Wines has leased 7,400 sqm at 58 Queensbridge Street, Southbank.

Key Indicators

Market Balance, as at March 2012

Download a PDF of the Melbourne CBD Q112 Market Overview