Melbourne Office Vacancies to Surge on Glut, Morgan Stanley Says

April 8 (Bloomberg) -- Melbourne’s office vacancy rate will jump to about 11 percent this year from about 8 percent now, as supply outpaces demand, Morgan Stanley said.

About 327,000 square meters (3.5 million square feet) of space is expected to come on the market between now and 2015 in Australia’s second-biggest city, analysts led by Lou Pirenc wrote in an e-mailed report today. Major projects under construction include 107,500 square meters in the North and South Towers on Bourke Street in the Docklands, an extension of Melbourne’s traditional business district; and 30,000 square meters in an office and retail building in the city’s central business district, he said.

“A lot of this supply is in fact pre-committed,” Pirenc wrote. “However, without a pick up in office demand, this new supply is likely to result in a higher level of backfill and sublease space re-entering the market.”

Victoria state, of which Melbourne is the capital, had a seasonally adjusted unemployment rate of 5.5 percent in February, compared with 5.2 percent in New South Wales state and 4.5 percent in Western Australia, and a national rate of 5.4 percent, government figures show. Tenants in Melbourne’s central business district, mainly in the finance industry and government, are consolidating space and relocating to higher-quality buildings in the Docklands, broker CBRE Group Inc. said in a report last month.

“This is an environment where tenants typically have the upper hand in rental negotiations,” Morgan Stanley’s Pirenc said in his report. “With weaker relative demand, and a relatively large development pipeline, we expect landlords will favor filling space and offering incentives, rather than waiting for a better deal.”

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