Victorian government to cull office space as staff cuts and working from home costs hit landlords

Melbourne’s commercial landlords are facing a hit as the state government moves to abandon tens of thousands of square metres of CBD offices.

The government downsize was first hinted at by state treasurer Tim Palas in 2020, with more staff working from home causing flow-on effects to the amount of office space needed.

Prominent commercial real estate firm JLL has now estimated it will total at a 20,000-40,000sq m reduction in government leased office space over the next 2-3 years. It equates to up to two times the arena size of the MCG, which measures 20,000sq m.

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The state is currently believed to be renting close to 300,000sq m, across the city.

It comes as Lord Mayor Nicholas Reece has revealed he is hoping to investigate converting empty towers into vertical hospitals, schools, entertainment precincts, and aged care or other medical use to get more people back into the CBD and cut back on building demolitions.

The JLL projection is based on projections of a reduction in their office needs in the future through a mix of lower staff numbers and significant portions of their work force logging on from home, but is subject to there not being a change of government.

By contrast, the MCG arena covers about 20,000sq m from fence to fence.

The state government is believed to be renting almost 300,000 sqm across the city. Picture: Dylan Alcott Photo: iStock

Revealed in JLL’s Real Melbourne Narrative document released Friday, the figures indicate a looming blow to the CBD where the 15 largest corporate groups have already pulled out of 320,000sq m of office space since the start of 2020.

JLL joint head of office leasing Victoria, Nick Drake, said while Melbourne was currently home to a one million square metre vacancy, there were early signs of recovery and the coming 18 months were expected to improve the situation.

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Mr Drake said there was strong demand for leases in the city’s prime office space at the east end of Collins St, with that demand expected to ripple out to other precincts with parts of Docklands likely to be the last to turn the corner.

He added that the leading leasing groups at the moment were in the legal industry, as well as financial sectors. But into the future he was expecting more leases to be signed for educators and biomedical groups.

Mr Reece spoke at the launch of the JLL report and revealed he would like to explore less conventional ways to boost the CBD’s long-Covid recovery, taking a further step to existing suggestions of turning empty office buildings into apartment complexes.

The state government announced cuts to headcounts and office spaces as more staff work from home. (Photo by Asanka Ratnayake/Getty Images)

Describing empty office spaces as a billion-dollar issue for Melbourne, he said he was keen to investigate other options inspired by vertical cities such as Singapore.

These include vertical schools, vertical hospitals, more aged-care towers as well as entertainment and hospitality buildings.

“A lot of them are ‘80s and ‘70s buildings, and great buildings, and it wouldn’t be acceptable to demolish them because of the environmental costs of doing that,” Mr Reece said.

“We need to get away from the mindset of demolition as a first option.”

There are currently three sites along King St where buildings have been demolished to make way for new towers, but where construction has yet to commence.

Mr Drake said the idea could have merit in some locations across the city, and would certainly help diversify the CBD.

The Department of Government Services was asked to comment.

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