Office construction in Melbourne to take a break

Rents are expected to rise in the city as white-collar employment increases.

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.

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".

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"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.

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Office construction in Melbourne to take a break