All play in Melbourne CBD

Melbourne had the second lowest CBD retail and CBD office vacancy across the nation prior to the onset of COVID-19. In 2020, the vacancy rates for both sectors began to increase as mandated lockdowns halted in-office work and enforced lockdown travel limits. The Melbourne CBD retail vacancy rate peaked in December 2021 and has been declining consistently, while the CBD office vacancy rate has continued to trend higher, begging the question – why the disparity?

Analysing pedestrian activity provides context on the condition of the CBD. Coinciding with the increase in retail and office vacancy rates, pedestrian activity in the six months to June 2020 was down by 45% and metropolitan train patronage by 50% compared to the previous bi-annual period. During this same period, office landlords contended with tenants downsizing or opting for flexible co-working spaces in lieu of traditional office space.

Figure 1: Melbourne CBD retail vacancy

Source: JLL Research, Q4 2023

The disparity between office and retail recovery in Melbourne CBD widened in December 2021. While CBD retail vacancy rates began to trend downwards, office vacancy rates continued to drift upwards. By the end of December 2023, Melbourne’s CBD retail vacancy rate was 6.7% (only 0.9 ppts above the 10-year average), whereas the CBD office vacancy rate is at a record high of 18.2% (8.5 ppts above the 10-year average). Melbourne’s CBD retail vacancy is the second lowest in the country after Canberra. On the other hand, Melbourne’s CBD office vacancy is the highest in the nation, with 3.7 ppts above the national average of 14.5%.

Figure 2: Melbourne CBD office vacancy

Source: JLL Research, Q4 2023

Since the trough of travel within the CBD in 2021, international arrivals into Victoria (1.86 million as of September 2023) have rebounded to 60% of 2019 levels (3.13 million). In the twelve months to December 2023, pedestrian activity has rebounded to 84% of 2019 levels. The influx of international travellers and students, as well as the implementation of return-to-office mandates, likely drove a further recovery in foot traffic. 

Figure 3: Pedestrian activity and metropolitan train patronage (February 2018- February 2024)

Source: City of Melbourne, Department of Transport and Planning, JLL Research, March 2024

Post-pandemic, consumers are being drawn into the CBD for social reasons, entertainment concerts, recreational activities and cultural exhibitions. City of Melbourne data shows that there was a 26% uplift in pedestrian traffic during the Taylor Swift concert across the local government area compared to the same weekend last year. AFL games are also becoming ‘evermore’ popular, contributing a 30% boost in spending in Docklands during game days, according to the City of Melbourne. More broadly, food and beverage establishments benefit from pent-up demand with spending despite the elevated cost of living. 

With a decline in vacancies across prime and secondary shopping streets as well as shopping centres, the overall retail vacancy rate in Melbourne CBD decreased to 6.7% in December 2023, albeit it remains well above the pre-covid 10-year average of 2.8%. As occupancy rates have increased, there has also been an uplift in centre turnover. For example, GPT’s Melbourne Central recorded MAT for December 2023 at AUD 612.3 million (+17.7%), which was 4% higher than in December 2019.

On the other hand, the CBD office market is still working through structural changes. Vacancy is negatively impacted by the Docklands precinct (with a vacancy rate of 20.7%), which is characterised as the back-of-house offices of large multinational corporations. Given the solidification of hybrid working policies by many large occupiers and a notable office supply pipeline, it will likely take some time before the Melbourne CBD office vacancy rate trends materially lower.