Melbourne CBD landlords step up spec-suites supply

Landlords in Melbourne’s CBD have recently been increasing their presence in spec-suites as small tenants continue to carry the office market.

September 20, 2022

With JLL Research continuing to observe the rise in small tenants dominating the Melbourne CBD market over the past 12 months, addressing small tenants’ demand appears obvious from a landlord’s point of view. Close to 76,000 sqm of net absorption has been attributed to small tenants in the CBD, with total net absorption equalling -54,700 sqm over the same period for larger occupiers (>1,000 sqm). Small tenant net absorption has been positive for the last six consecutive quarters in Melbourne’s CBD.

Melbourne’s CBD office asset owners are increasingly responding to this demand by building speculative suites (spec-suites) or ‘spec fit-outs’. This new form of office supply is a key differentiator in the traditional office market. Spec-suites are formally characterised by new fit-outs constructed by the landlord without any pre-agreed lease commitment from future tenants. Essentially tenants can transact these spaces without needing extensive internal fit-outs.

The concept of landlords taking on the construction risk and delivering the fit-out ultimately incentivises tenants in their decision-making processes. The secondary benefit of a timely move-in and move-out factor further adds to its popularity. With high vacancy levels across all office markets, spec-suites provide occupiers greater flexibility and choice to meet their office space requirements.

Melbourne CBD – Quick facts
  • Prime-grade assets dominate the spec-suite market, providing 79% of the turnkey solutions
  • Current market stock is focused on the 200-400 sqm space with close to 90 under construction as of 2Q22
  • A significant quantity of spec-suite stock is due to arrive in the market in 4Q22-1Q23
  • Spec-suite prime-grade rents average $724/sqm per annum, with secondary-grade rents averaging $588/sqm annually
  • GPT Group is expected to deliver the vast majority of NLA to the Melbourne CBD market

Figure 1: Spec Suites by Size Bracket

Source: JLL Leasing

Interestingly, the rent uplift does not tightly correlate to the amount spent on the initial fit-out. Rather tenants are seeking office space within prime-grade buildings in prime locations. To provide some colour, construction costs for these suites can range anywhere from AU$ 800-1,900/sqm, with the typical rental value ranging from AU$ 588-724/sqm. By comparison, prime and secondary net face rents range from AU$ 464-638 per sqm per annum in the CBD, showing that tenants are paying a premium to occupy speculative-suite office space. This rental premium also stems from drastically lower incentive levels (10%-15%) for spec-suite space, with typical office incentives in the CBD averaging at 38.0%.

Although the development of spec-suites has been growing rapidly in recent times, we expect demand to remain reliant on improving business confidence and centralising Melbourne’s metro markets. Landlords are conscious that pre-emptive construction fit-outs within prime office locations will determine the level of demand from tenants.

Whilst the popularity of spec-suites is largely concentrated in Melbourne, JLL expects much of the east coast to follow suit over the next 2-3 years. Creating a turnkey solution for small businesses will kick off the next chapter of Melbourne’s CBD office market.