St Kilda Rd offices even harder to come by

Vacancy in Melbourne’s St Kilda Rd office market is set to fall to a 15-year low as stock withdrawal and residential development begin to bite.

A Knight Frank report predicts office vacancies along the city fringe strip will hit their lowest point since 1992 in the next 18 months, with prime stock vacancy already at 6.9% and apartment developers continuing to circle office buildings on both St Kilda Rd and nearby Southbank.

The report shows more than 15,000sqm of office stock was pulled from the St Kilda Rd market in the last six months of 2015, with 20% of the precinct’s total office space disappearing over the past 15 years.

In the report, Knight Frank director of Victorian research Richard Jenkins says that while most of the offices currently being targeted by developers are B-grade buildings, the loss of stock is still significant.

“Looking forward, the persistent residential developer demand for inner city sites will result in further St Kilda Rd and Southbank office withdrawals,” Jenkins says.

The St Kilda Rd and Southgate office markets are becoming increasingly tight.

“Over the medium term a further 130,300sqm and 47,600sqm is forecast to be permanently withdrawn from the St Kilda Rd and Southbank office markets, respectively.”

Among the space lost to residential developers in recent deals is the 10,241sqm former AAMI building at 601 St Kilda Rd, along with a further 9600sqm at 14 Queens Rd and 4585sqm at 450 St Kilda Rd.

Meanwhile, investors continue to pay a premium for buildings within the Southbank precinct and St Kilda Rd, with some yields dipping below 2%.

An undisclosed buyer, understood to be a residential developer, paid $27 million on an almost unheard of 1.41% yield to secure 256-260 City Rd, Southbank, while the Growland Group – formerly known as Golden Asset – bought 613 St Kilda Rd and its 8426sqm of floor space from a private investor for $12.1 million on a 2.41% yield.

A Chinese buyer paid more than $32 million for a group of properties at 216-222 City Rd, Southbank.

And in April a group of 23 owners of properties between 216-222 City Rd, Southbank, combined their offices, apartments and car spaces and sold them to a Chinese developer for more than $32 million.

Rents are also set to be affected as office stock availability diminishes, with prime incentives on St Kilda Rd already dropping to between 20% and 25%, and prices per square metre rising steadily in Southbank over the past year.

The report says that Southbank offices are so tightly held that during April there was only one building in the entire precinct with more than 2000sqm of contiguous space available.