Co-working and flexible office space continue to drive deals

The Savills Blog

VIC Office Leasing: Co-working and flexible office space continue to drive deals

Co-working and related flexible office space, in conjunction with state and federal government expansion, have fuelled office leasing demand in Melbourne throughout 2018.  

The Melbourne-based Office Leasing team has capped off a record year of negotiations, with WeWork, Hub Australia (3,500sq m), and the Department of Justice among the secured tenants.

Diverse deals throughout the market

A diverse range of transactions have taken place in 2018, ranging from a high volume of small suites to a series of whole and multi-floor leases.

Most private sector tenants are taking up expansion space to cater for planned growth, putting further pressure on the demand side of the office market equation.

Migration is also underpinning demand, with Melbourne now one of the fastest-growing cities in the western world. 

It is worth noting most Australian capital cities have a population similar to the number of square metres of CBD office stock.

A look at 2019

Vacancy for A Grade accommodation has been sitting at sub 3.0 percent in July, and will fall to record lows in 2019 on the back of the demand. 

Not surprisingly, rental growth has been well above forecast levels.

Unexpectedly in the current conditions, office lease incentives have remained stubbornly high, with a real disconnect evident in the market.

Tenants with leases expiring in 2019 and onwards would be well advised to review budgets to cater for these increases.

While 2020 and 2021 will see 11 new projects delivered in Melbourne, along with increased vacancy as a result of the increased supply, the new rent levels set in 2019 will hold into 2020 and 2021, with steady demand and a steady economy.

Incentives are likely to move higher as a result of the new supply in 2020/21.

The rise of the city fringe

Melbourne’s city-fringe markets are playing a larger role in providing for tenant demand, and several major IT office-users have cemented Cremorne in the inner east as Melbourne’s new tech precinct.

The size, quality of stock available and market rents in the fringe markets are keeping pace with recent significant CBD increases.

Across all Melbourne office markets, both landlords and tenants should be seeking advice to ensure they are keeping abreast of a very dynamic marketplace.

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