St Kilda Rd Vacancy at Lowest Level in Eight Years

25 August 2016

Rents climb 12 percent in 12 months

The office vacancy rate on Melbourne’s most famous boulevard, St Kilda Road, has fallen to 7.3 percent, its lowest level in eight years and 38 percent below the average vacancy over the last 25 years of 11.8 percent, according to Savills latest Office Fringe market research.

Manager Research & Consultancy, Monica Mondkar, said the tighter market, which has seen vacancy fall from 10.8 percent in July 2013, had driven rental growth of 23 percent over the last three years including 12 percent in the last 12 months.

"Net face rents in July 2013 ranged between $270 and $325, and in July 2016 between $340 and $400. Based on an average rent, that is a 23 per cent rise over the last three years.

"While that percentage does not represent every rental struck and will obviously vary from transaction to transaction, it nevertheless represents notable, across the board, growth," Ms Mondkar said.

The vacancy peaked at 22.4 percent in July 1992 following the Savings and Loan Crisis and has been on a perpetual rollercoaster ride ever since, however, according to Savills Associate Director Office Leasing, Kizzy Okoukoni, the latest figure is more to do with the iconic boulevard’s residential makeover than an economic recovery.  

"Ongoing demand for CBD fringe office space is of course a key contributing factor in the tighter vacancy level but the continual withdrawal of stock for other uses, predominantly residential, has also been a significant determinant,’’ Mr Okoukoni said.

Despite residential conversions St Kilda Road remains Australia’s fourth largest non-CBD office market with 686,175 square metres of office space. It has lost less than 1.2 percent of office space to residential use per year over the last ten years, however this has accelerated in recent years.

"It’s only a matter of time before the commercial/residential property profile balance in St Kilda Road, which currently has a two thirds office/one third residential mix, shifts permanently to residential.

"For some landlords maintaining an older office building with any vacancy, on top of exorbitant land taxes, is not a long term option.

"There is no way this can stack up when a residential redevelopment can mean such a massive increase in return on the property and that means we are going to see the march towards residential use continue to the point where residential dominates the streetscape," Mr Okoukoni said.

He said those office buildings that remained would be those which were more modern and that housed tenants on long term leases, however despite the incentive to convert to residential use, office property would always maintain a significant presence on St Kilda Road.

"Residents need services, they need supermarkets, they need childcare, they need restaurants, cafes, accountants, financial planners, gymnasiums, etcetera.
"And there will always be corporations that wish to locate their offices on St Kilda Road for whatever reasons be they aesthetics and parkland views or lower rents and fewer crowds and better parking and accessibility than the CBD," Mr Okoukoni said.    
Ms Mondkar said total investment sales on St Kilda Road were $246 million with the most notable purchases AMP Capital’s acquisition of 636 St Kilda Road for $87.5 million and Bayley Stuart Capital’s purchase of 616 St Kilda Road for $40 million with domestic funds and syndicates accounting for 52 percent of the sales by value.

She said yields on the boulevard over the 12 months had firmed by 25 basis points and now range from 6.75 to 7 percent. In September 2013 yields ranged from 8 to 8.75 percent.

Click here to view Savills Melbourne Office Fringe Briefing for Q2/2016.


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