Melbourne office tenants leave CBD and head to the suburbs

“This goes beyond the raw size of the entire premises, extending to the way different spaces are  used such as how much of a space is devoted to desks, and how much to collaborative spaces and amenities,” Fitzroy Agency associate Stephen Land said in a statement.

“This highlights the fluid nature of how office space sizes will now be measured, as these types of arrangements are very much likely to differ on a case-by-case basis.” 

Looking specifically at Melbourne, Mr Land explained that the shift in tenant preferences and space requirements, along with the change in rents, has resulted in the movement of tenants out of the city’s CBD and into the city fringe and inner suburban locations.

And while Mr Land does expect the CBDs to maintain a level of interest, especially from businesses that may previously have been priced out of the market, he predicted that immediate CBD fringe suburbs will likely see more interest.

“There are plenty of businesses seeking a move to city fringe and inner suburban locations to be closer to their home, making it easier to access the workplace and collaborate with colleagues in-person during a period of more flexible working hours and arrangements,” Mr Land said.

Mr Land cited new data from the Property Council of Australia, which revealed an increase in the Melbourne CBD vacancy rate of 8.2 per cent over the past six months.

Moreover, the data revealed an estimated 350,000 square metres of office space was added to the CBD market in 2020, with 390,000 sq m more expected over the next three years... Conversely, multiple estimates pin the pending amount of city fringe stock at above 270,000 sq m over the three-year period.

What tenants are looking for

The suburbs cited to see most demand include those with good accessibility.

“Hawthorn in particular has seen strong enquiry as an inner-city suburb that is well serviced by public transport, easily accessible via car with major arterial roads nearby, and offering more competitive rents as opposed to suburbs right on the city fringe,” Mr Land tipped.  

“Workers have now had an extended period of working without having to spend the usual time in the day in the car or on public transport, and accessing the office easily and quickly for more casualised arrangements will be important in returning to the workplace,” he continued. 

As such, Mr Land believes larger companies could establish smaller satellite offices in the suburban areas to spread workforce as a risk management strategy. These companies in particular could seek offices in freehold buildings within the CBD fringe suburbs and areas or buildings with multiple lifts and start access. 

“We are seeing a lot of tenants looking for spaces in the range of 200 sq m to 500 sq m – this is a size that can be easily moved without the cost being too significant.”

However, despite this trend, larger spaces could still attract a fair bit of attention. 

“Tenants may be downsizing to accommodate more staff working from home, upsizing to allow for social distancing measures, or moving to a space that allows for more flexible allocation of different activities – working at desks, collaborative and meeting spaces – and wellbeing components such as appropriate social distancing and natural light.”  

Fitted spaces will also continue to be more sought after than open-plan refurbished spaces as they allow for an easier transition.

Proactivity needed 

But as office market demand rises, Mr Land sees an increase in incentives offered to tenants as landlords are forced to compete for leases. 

“As an indication and subject to office grade, these would generally range between 10 per cent to 20 per cent of the total income from a lease 12-18 months ago,” Mr Land said. 

Noting that while it is still early to identify any clear patterns, Mr Land said it is anticipated that they might increase significantly in some cases as demand lifts. 

“Landlords need to be proactive and understand the levels being offered by other landlords in the  market in order to secure a tenant,” he concluded.