Melbourne's city office construction cycle will take a breather in 12 months as nearly 200,000 square metres of space is completed and a year goes by before another building opens its doors and cranks up its lifts.
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Real estate agents Knight Frank expects the office vacancy rate to rise to 9.2 per cent by the middle of next year before contracting through to 2017 due to the slowed development pipeline. Rents are also expected to rise as white collar employment in the city increases every year.
A string of buildings on Collins and Bourke streets, including 567 Collins Street, 699 Bourke Street and KPMG's new 55,000 square metre office at Walker Corp's Collins Square, will round out the present cycle of construction.
Knight Frank director Hamish Sutherland said this "will give the market a chance to catch up. It will be good for landlords and rents, and it gives us a chance for any oversupply to reduce".
"But 12 months isn't a long time," Mr Sutherland warned.
CBRE director Andrew Tracey agreed.
"There's a long lead time for new projects. Smart tenants are taking advantage of the state of the market. If they do a deal now they can lock in a good lease for the next 10 years," Mr Tracey said.
Knight Frank research showed that prime net face rents increased by 5.3 per cent to an average of $486 a square metre in July, but incentives designed to encourage new leasing deals increased to 30 per cent from 26 per cent, which led to a slight decrease in effective rents.
But an easing of incentives is likely to result in real rental growth. Prime net face rents are expected to grow by 3.6 per cent in the next five years and effective rents by 6.9 per cent.
Net absorption is expected to total 51,700 square metres this year before rising to 88,500 square metres in 2015.
Potential new developments on the horizon include a possible new 75,000 square metre tower for Telstra at 288 Exhibition Street and the redevelopment of Cbus Property's 447 Collins Street site. The state government is also investigating covering another 3.3 hectares of space above the rail yards leading into Flinders Street Station.
Agents report strong inquiry among tenants trying to upgrade their space within the city or moving in from the suburbs.
"There's a lot of demand coming on to the market and there's some existing enquiry that will come to fruition soon," Colliers International director Andrew Beasley said.
Pharmaceutical multinational Glaxosmithkline is looking to come into the city from Boronia, Foxtel moving from Moonee Ponds and Philip Morris from Moorabbin.
Knight Frank research director Richard Jenkins said pre-commitment levels for the 265,685 square metres space under construction is holding at a healthy 63 per cent, with 90,900 square metres expected to be vacated by shifting tenants.
JLL head of leasing Tim O'Connor said Melbourne's CBD is experiencing another round of centralisation, with Viva Energy and Pragmatic Training both committing to CBD space in the September quarter.
"The acquisition of office stock with residential conversion potential in St Kilda Road will support further centralisation in the next two to three years," Mr O'Connor said.
Knight Frank research showed 87,800 square metres of CBD office space has been earmarked for withdrawal as older office stock is converted to residential developments.
