Melbourne’s poorest-quality office stock has tightest vacancy rate: City of Melbourne report

Melbourne’s poorest-quality office stock may become sought after by investors following a new report showing D-grade offices have the lowest vacancy rate of all office types in the city.

The vacancy rate for “inferior quality” D-grade office stock in the city stands at just 2.2%, less than half the vacancy rate of premium-grade stock (5.9%) and well below the 3.5% vacancy rate for high quality A-grade stock, according to the latest City of Melbourne Property Watch report.

Based on current total D-grade office stock of only 121,000 square metres, this equates to around 2,700 square metres of available space to rent.

The least attractive office grade from an investment point of view appears to be C-grade, “average” office stock, which has a vacancy rate of 10% and more than 574,000 square metres of total space.

No new D-grade space has been added to the pool in the 12 months to January 2012, while there was 3,300 square metres of C-grade office space added to the market over this period.

Demand for D-grade office space indicates that businesses still want to be based in the city, but cannot afford the rents charged for better-quality office space, the Property Council of Australia Hunter regional director Andrew Fletcher said when reporting on a similar phenomenon in Newcastle.

The tightest office market in the Melbourne CBD is Docklands, which has a vacancy rate of just 0.8%.

C-grade and D-grade offices have “poor air quality, poor lighting, low-grade amenities and have no minimum standards for building, floor space or environmental ratings” reported the Canberra Times in January.

The report says there is 623,000 square metres of premium-grade space, 1.8 million square metres of A-grade space and 931,000 square metres of B-grade space.

Yields for premium-grade office space range from 6.75% to 7.25%; they range from 7.25% to 8% for A-grade and 8.5% to 9.5% for B-grade.

Yields on the sought after St Kilda Road office market range: 8.75% to 9.25% for A-grade and 9% to 10% for B-grade. 

The report does not provide yields for C-grade and D-grade stock.

The Melbourne CBD office market (incorporating Docklands) is the second largest in the country and currently comprises 4.1 million square metres of office space.

Only 41,201 square metres of new supply was introduced to the market over the 12 months to January 2012, well below the annual 10-year average of approximately 135,000 square metres.

Report author Amanda Walker says the Melbourne CBD office market has the second lowest vacancy rate of mainland capital cities and has recently enjoyed moderate growth in rents and capital values.

“The market is currently considered balanced that is demand driven, rather than supply led.

“Offshore demand for Melbourne CBD office investments appears to be strengthening, highlighting the market’s resilience and appeal as a global investment destination,” she says. 

“In a period of global economic uncertainty, the outlook for the Melbourne CBD office market remains positive. Continued stability and anticipated rental growth is likely to continue to be a key attraction for offshore investors.

“Limited forecast growth in white collar employment over the next 12 months, together with a lack of new supply in the first half of 2012 is likely to keep vacancies at similar levels before new stock and backfill supply comes online,” she says.