Melbourne's declining vacancy rate is underscored by new research showing a 20 per cent fall in the number of whole floors available and only 19 prime buildings able to offer contiguous space options.
The total number of premium and A-grade vacant whole floors has fallen to 175 from 220 last December, new research from Savills Australia shows.
Research manager Monica Mondkar said available full floor space was at 270,486 square metres in May, down 20 per cent from the 339,022 square metres recorded at the end of December when 220 full floors were available for lease.
The shrinking options signal a shift in power in Melbourne's office markets – back to the landlord after several years of tenants holding the upper hand.
Savills Victorian state director of office leasing Mark Rasmussen said "the era of 30 per cent incentives is finished and that means upwards pressure on rents".
"Clearly the market is tightening. The key indicator – net absorption – has been growing steadily over the last 12 months," he said.
The CBD vacancy rate is expected to drop to the low 7 per cent range next month from 7.7 per cent recorded in February.
Vacancy is then expected to rise again early in 2017 when up to 80,000 square metres of backfill space becomes available, but that situation will not last long.
Colliers International national director of office leasing Andrew Beasley says "a flurry" of space is coming up in the next 12 to 18 months.
Lang Walker's $2 billion Collins Square is home to several new corporate tenants who will leave gaping holes in the CBD office market – 21,000 sq m opens up at 161 Collins Street after KPMG moves and a further 20,000 sq m at 2 Lonsdale Street is up for grabs when Link Market Services also shifts to Collins Square.
A further 23,000 sq m will be vacant at Freshwater Place when PwC moves next door at 2 Riverside Quay and 16,5000 sq m, vacant since Westpac moved from 360 Collins Street, has become available after a long refurbishment by Dexus. Murray Goulburn is understood to also be moving out of Freshwater Place into new space at Docklands and MLC is set to vacate 700 Bourke Street and is looking for new digs.
"But once this space is taken up, we are going to see a significant shortage of supply. Vacancy will really tighten up in 2018 and into 2019," Mr Beasley said.
The situation is underscored by the lack of new office buildings on the horizon. Colliers International director of research Anneke Thompson said only three new office buildings are under construction in Melbourne's CBD – 664 Collins Street which is due for completion in June 2018 and buildings two and four at Collins Square which are expected to be finished this year.
"This is the end of the last cycle and the first buildings in the next cycle – 447 Collins and 477 Collins – won't be completed until 2019-2020," Ms Thompson said.
"This is the last push of supply for the CBD before both Docklands and CBD sites start to run out in 2020," she said.
"Beyond that, we see vacancy falling further as the supply pipeline really starts to thin out. By mid-2019, the vacancy rate is forecast to be as low as 5.2 per cent and the A-grade market should be at 5.6 per cent which is very low by recent standards," she said.
Declining vacancy rates are already contributing to rental growth, with the latest data showing 8.6 per cent annual growth in net effective rents for premium space and 6.1 per cent growth for A-grade, she said.
