Melbourne’s CBD office market is on the way to recovery, according to the latest research from Knight Frank.

Knight Frank’s Melbourne CBD Office Market – September 2024 report found the market was nearing its nadir, with key indications including flat prime yields, stabilising capital values, falling net absorption declines and expectations of economic and employment growth for 2025.

Prime yields remained flat at 6.4% over Q2, indicating that their peak may have been reached, while prime capital values were also stable over the quarter.

The research found 2024 has had low investment volumes, but would likely surpass 2023, with volumes currently standing at $792 million compared to $832 million for the whole of last year.

Meanwhile, net absorption was -15,435sq m for H1 2024 - an improvement on the restated -37,435sq m recorded in H2 2023. Prime net absorption was -7,737sq m, but premium net absorption remained in positive territory.

Knight Frank Partner, Head of Leasing Victoria Hamish Sutherland said the market had not been as active in terms of new enquiry over Q2, but it was becoming more stable, with greater activity  expected over the remainder of the year.

“The post-COVID uncertainty has persisted in the Melbourne CBD office market for some time, but we are seeing signs of improvement, including net absorption trending upward for the past 18 months,” he said.

“The majority of large occupiers have now completed their revaluations of space requirements and are now moving forward with confidence.

“The appetite for quality space in terms of buildings and locations has remained strong, with net absorption for premium space remaining positive. 

“The first half of the year was quieter in terms of activity but since then we have seen a pick up in activity that we expect to continue for the remainder of the year.

“Deals have taken longer to complete due to the choice on offer, with tenants taking their time to make the right decisions.”

Knight Frank Partner, Research and Consulting Dr Tony McGough said the economic rebound in Melbourne was expected to be the strongest of the major markets following the nationwide slowdown, which would underpin a recovery in the CBD office leasing market.

“Melbourne’s GDP is expected to reach a peak of 4.4% growth by 2026,” he said.

“Strong population growth is propping up Melbourne’s economy, with a forecast of 3.1% growth this year, ahead of the Australia’s growth rate of 2%, and moving forward Melbourne’s population is forecast to grow at 0.5% per year above Australia’s growth rate.

“In line with growth in the economy, employment growth in Melbourne’s CBD is set to recover, with growth forecast to double in 2025 from the 1.4% seen in 2024 to 2.9%. 

“It is expected that the return to more substantial employment growth, combined with a wider continued trend to return to the office and improving business confidence, will revitalise the weekday CBD and support stronger net absorption.”

The Knight Frank report found the vacancy rate in Melbourne’s CBD office market rose from 16.4% to 18% over the first half of the year, due largely to the large jump in premium vacant space (from 11.2% to 16.1%) as the Melbourne Quarter Tower was completed, with 70.5% vacant space.

“With no space coming online in H2 2024, Melbourne may be reaching a peak in its vacancy rate,” said Dr McGough.

“Indeed, a return to positive net absorption at the next data point would see the vacancy rate fall in H2.”

The report also found that prime net face rents rose by 2.3% in Q2 to $716/sq m, with all of the growth coming from the Eastern Core as the long-reported flight to quality continued.