Office vacancies in Melbourne to surge amid glut, says Morgan Stanley

Melbourne's office vacancy rate will jump to about 11 per cent this year from about 8 per cent now, as supply outpaces demand, Morgan Stanley says.

About 3.5 million sq ft of space is expected to come on the market between now and 2015 in Australia's second-biggest city, analysts led by Lou Pirenc wrote in a report yesterday.

Major projects under construction include 107,500 square metres in the North and South Towers on Bourke Street in the Docklands, an extension of Melbourne's traditional business district; and 30,000 square metres in an office and retail building in the city's central business district.

"A lot of this supply is in fact pre-committed," Pirenc wrote. "However, without a pick-up in office demand, this new supply is likely to result in a higher level of backfill and sublease space re-entering the market."

Victoria state, of which Melbourne is the capital, had a seasonally adjusted jobless rate of 5.5 per cent in February, compared with 5.2 per cent in New South Wales state and 4.5 per cent in Western Australia, and a national rate of 5.4 per cent, according to government figures.

Tenants in Melbourne's central business district, mainly in the finance industry and government, are consolidating space and relocating to higher- quality buildings in the Docklands, broker CBRE Group said in a report last month.