Competition for premium space is helping to sustain the robust demand experienced by Melbourne’s fringe and metro leasing markets over the past few years.

Based on Knight Frank’s Melbourne City Fringe and Metro Office Market Report October 2023, net absorption strengthen by 46,102sqm in the first half of the year – with city fringe (42,000sqm) and metro office market demand up 42,000sqm and 4,000sqm respectively.

As a result, the overall vacancy rate improved from 11% in October last year to 9.7% in July this year in the city fringe market, while the metro rate rose slightly to 7.9%.

Compared to the CBD, Knight Frank data suggests the metro area continues to benefit from its tenant client mix.

City Fringe

While the metro office market will see limited new developments, Knight Frank’s research suggests the City Fringe will post record new developments in 2023. However, while over 130,000sqm expected to be delivered to the City Fringe this year, the supply pipeline is expected to cool off in 2024.

“Going forward there are major projects lined up for early 2024, including One Middle Road (20,000sqm) and 633 Springvale Road (8,600sqm), which will put some pressure on the vacancy rates outlook in the metro area in the short term,” said Knight Frank’s head of research and consulting Victoria Dr Tony McGough.

Impacted by weakening tenant demand in the neighbouring CBD, McGough expects city fringe and metro areas to be more resilient than St Kilda Road.

He expects the major refurbishment of Mirvac’s 380 St Kilda Road – providing high-quality space positioned just opposite the new ANZAC train station – to provide evidence as to the strength of the location to attract new tenants.

While rents have remained stable across the markets, Knight Frank data suggests incentives are on the rise, which is leading effective rents lower.

200 Victoria Place achieved full commitment within three months of practical completion, highlighting confidence in the City Fringe office market

Collingwood and South Melbourne

Continuing to attract tenants, due to the abundant retail amenities surrounding the office buildings and easy transport access, the bulk of the leasing activity in the first half of the year centred around Collingwood and South Melbourne.

McGough attributes strong demand for new stock to tenants continuing to upgrade their space and location. However, in line with the economy as a whole, he’s witnessing a markedly quieter H2 2023 compared to the start of the year.

“200 Victoria Place achieved full commitment within three months of practical completion, highlighting confidence in the City Fringe office market,” said  McGough.

“Meanwhile, 11 Eastern Road, South Melbourne is now complete, with Levi’s committed to 1,000sqm and a further 3,000sqm under offer… in the metro office market demand in the first half of the year started to rebound following a slowdown in 2022.”

Outer East

Within the metro office market, the Outer East has according to Knight Frank data, emerged as the strongest precinct in the first half of 2023, with around 23,000sqm of net absorption recorded.

While inner east demand also improved with around 2,100sqm of net take up, south east and north west markets slowed, with negative net absorption. Overall, this put the metro market’s net position at near neutral moving into H2 2023.

While 2022 started off strong for financial services, with 56% of overall take-up, Knight Frank data points to reduced sector demand in 2023.

“However, public administration has filled the gap this year, and with health care, professional services and real estate all increasing their share of take up, with the latter rising from 4 per cent to 14 per cent, the diversified base provides a small but steady amount of demand in the wider metro area,” McGough said.