Melbourne’s fringe office market has long recorded strong rental growth in prime and secondary assets, with some pockets even outperforming the city’s CBD.
Melbourne’s fringe market totals 1.59 million sqm, with prime office stock making up 40 per cent of commercial space – less than the CBD’s 60 per cent.
JLL research and leasing teams are tracking 55 projects less than 1,000 sqm, which could deliver an additional 272,700 sqm of office space to the market by 2024.
The northern fringe has the highest level of pre-commitment, with seven buildings under construction or completed.
“A unique make-up of universities and hospital as well as the major new projects on Elizabeth Street will set new rental benchmarks and spur on further development activity in the post COVID–19 environment,” JLL predicts.
While two major projects are underway for the southern fringe, analysis of the revised pipeline indicates that potential supply – under construction, plans approved and applied and proposed – remains heavily weighted to the Yarra precinct.
However, the uncertainty caused by the coronavirus pandemic could slow the development of the Yarra precinct.
“Many speculative projects that were being mooted to deliver in 2021 and 2022 will be placed on hold indefinitely until such time as varied recovery scenarios begin and vacancy is absorbed,” JLL wrote.
“The speed of the recovery could mean that these sites are on hold for the foreseeable future.”
The St Kilda Road precinct remains a target for future withdrawals of office assets, with residential conversion a shifting focus for the area.
Demand for fringe office market
The fringe market has a slightly different market composition when compared with the diversity of the CBD, with education and training, retail trade, construction, health care and social assistance and real estate services the the top five sectors in terms of positive net take-up over the past 10 years.
“Urban amenity and great accessibility has provided the catalyst for the growth of Cremorne and Richmond as Melbourne’s leading technology precinct.” JLL wrote.
JLL believes small tenant net absorption will be greatly impacted in the wake of the pandemic.
“The economic uncertainty and financial hardship will see the majority of small tenants choose to stay in their existing locations until
the market recovers.
“Upon confidence returning, it is likely that smaller tenants will continue to favour certain fringe markets, due to affordability, proximity to the CBD and future growth,” JLL wrote.
JLL projects vacancy will rise to 13.7 per cent by the end of 2021 before reaching a second peak of 14.3 per cent in 2024.
“A stronger than expected demand recovery may keep vacancy contained below 13 per cent, but if the economic downturn is more
severe and sustained vacancy could exceed 15 per cent by 2022.”
JLL believes long-term macro trends remain likely to favour demand for office stock in fringe office markets.
“Melbourne’s liveability, relative affordability, education system, transparency and jobs growth are likely to support interstate and international population growth when travel restrictions are released,” it wrote.