Tighter supply, rising rents cloud Boroondara office market

Philip Hopkins January 28, 2012

TIGHTENING vacancy rates, rising rents and a poor supply of new buildings are clouding the outlook for the Boroondara office market this year.

Vacancy in Boroondara, which is centred on Hawthorn and Camberwell, tightened further in the final quarter of last year to 5.6 per cent.

The area is traditionally a high-performing market, with the affluence of the suburbs allied with a lifestyle ethic, quality offices and lower rents than the central business district.

Jones Lang LaSalle's manager of suburban office leasing, Michael Simonds, said little development had taken place in the inner eastern market in the past two years. Last year, just 5600 square metres of new space was completed, he told The Age.

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Mr Simonds said suitable sites available for commercial development were limited, and banks' funding criteria were tougher, putting pressure on new supply.

The banks' stringent lending criteria on prospective developers included high pre-commitment requirements and lower loan-to-cost ratios.

Mr Simonds said across the entire city fringe and inner suburban office market, only 6200 sq m of office space was under construction that was expected to be completed this year.

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Suitable sites were being snapped up by residential developers, he said. Examples included 83 Riversdale Road and 357 Camberwell Road.

Given the spread between economic rents and passing rents, Mr Simonds said tenants were choosing to absorb existing space or renew their current office space rather than pre-commit to new development. This was placing further downward pressure on vacancy rates.

''Large tenants looking for in excess of 1500 sq m have all but run out of options. In the Boroondara market, there is only one tenancy option available above 800 sq m in January,'' he said.

Further, some tenants had decided that buying might be a better option. For example, 172 Burwood Road was recently sold by JLL to a tenant who thought it was more economical to buy than pay rent over 10 years.

JLL research analyst Nicholas Wilson said the tightening market created a fertile environment for the above trend rent growth achieved last year.