Mid-town Melbourne sparks a renaissance for the roaring 2020s

MELBOURNE, October 2019 – With land supply in the Docklands almost exhausted, office investors are focusing on downtown Melbourne’s Cinderella – the Western Core.

This south-west corner of the CBD, spanning Elizabeth to Spencer streets and Flinders to Little Bourke streets, is now the CBD’s geographic centre and is expected to add 213,300 square metres to prime CBD office stock by 2022. This extra floor space comes in just three large projects. Refurbishment of older buildings in Queen and Bourke streets are also set to boost stock.

Melbourne CBD office vacancy is currently at a 30-year low of 3.8 per cent as tenants compete for prime and A-grade stock close to transport in Australia’s fastest-growing capital city.

JLL’s latest commercial property report, A Mid-Town Revival: Melbourne’s Western Core, says the precinct has become a hub for tenants seeking space under 1000 sqm –pushing the 2Q19 vacancy rate to 6.7% well below average vacancy for the precinct.

JLL’s Senior Director – Research, Annabel McFarlane, explains: “Over the last decade large organisations (especially finance and insurance services) moved out to purpose-built homes in the Docklands. However, the trend is reversing with large tenants returning to the Western Core, Melbourne CBD’s geographic centre. The West has attracted law, education and real estate firms squeezed out by residential development in the CBD’s north and costly leases in the Parliament, Civic Core and East precincts, where prime high-floor rents are up to 32% higher than in the Western Core

The Victorian Government’s Amendment c270 of 2016, which sets new rules for setback and overshadowing, has made the development of office sites more costly – and this has benefited the Western Core”.

Charter Hall’s Regional Development Director, Simon Stockfeld, said: “We are seeing the emergence of mid-town. Large tenants, investors, developers and property owners are investing in the precinct and new premium grade assets are filling up with tenants.”

JLL researchers have found this established but somewhat overlooked precinct is enjoying a surge in refurbishment, as 100 Queen Street and 500 (the former NAB offices) and 550 Bourke Street (formerly Deloittes) are revamped to meet modern requirements.

Just seven prime-grade assets have been completed in the Western Core and neighbouring Flagstaff since 2000, but activity is set to rise. Developments at 447 and 477 Collins Street and 405 Bourke Street and 555 Collins Street are four of the nine prime projects under construction, or soon to be, in the CBD, with 74% of space pre-committed.

The Docklands has boosted CBD office supply by 92 per cent since 2009, but is now largely built out.

JLL’s Executive Director – Office Leasing Major Projects, Stuart Colquhoun, said: “Melbourne’s Mid-town – the Western Core and Flagstaff – are in the midst of urban renewal. Though the past 10 years have seen an exodus of larger occupiers, new projects have broken this trend and many large groups have committed to the Western Core.

“After a decade of office and residential development in the Docklands, Melbourne’s economic heart has pulled west, with restaurants and cafes following the population growth,” Colquhoun said.

“Underdeveloped areas such as King Street are regenerating. Seedy establishments have moved out of the precinct, with mooted plans for Rialto re-development and 555 Collins Street examples of the strength in the repositioning.”

Recent Western Core developments include 567 Collins Street (Leighton Properties), a 26-level office building with 48,974 square metres of floor space and ground-floor retail; 525 Collins Street, a 6000 square-metre extension to the Rialto building; and 570 Bourke Street, a refurbishment and 15,500 square-metre extension that has taken the existing building to 50,800 square metres. 

Western Core rents remain affordable, thanks to a wider range of stock quality, including older buildings. About 17% of Western Core assets are prime grade.

Average prime net face CBD rents were $585/sqm as at 2Q19 and are expected to grow by 3.2% per year. In the Western Core and Flagstaff, prime rents were $512 (lower floors) to $637 (high floors). Close to Southern Cross and Flagstaff stations, and with improving food and beverage services and music venues, these precincts will continue to offer good amenity.