Melbourne CBD’s office market shows signs of stabilisation amid high vacancy, shifting demands
- Melbourne CBD’s 2024 vacancy rate remained at 18%, which is the highest since 1997.
- Tenant demand is focused on energy-efficient prime assets, while older stock struggles.
- Only 21% of metro space under construction is pre-committed, signalling tenant caution.
- Premium rents are rising; A-grade rents are falling due to incentives and building outgoings.
- Investment volumes are at a 20-year low, but recovery is projected to emerge by late 2025.
Melbourne’s CBD office market began to show early signs of stabilisation in Q1 2025 after enduring multiple quarters of subdued activity and high vacancy. The demand remains focused on prime-grade and flexible office spaces, while secondary and older stock struggle with weak tenant interest.
Cushman & Wakefield reported that the Melbourne CBD had a net absorption of -44,962 square metres (sqm) in the six months leading to January 2025, a drop from -15,462 sqm in July 2024 due to the removal of 63,412 sqm of office space. A-grade assets accounted for most of these withdrawals, totalling 44,000 sqm, reflecting a market preference for modern office spaces.
Moreover, JLL reported that Australian CBD net absorption reached 163,500 sqm in 2024, the best since 2018, while Melbourne's recovery remained slow. Sublease availability declined across Australia to its lowest since Q2 2020, indicating that businesses have now largely adapted to hybrid working models.
Meanwhile, Urban Property Australia (UPA) noted that Melbourne's CBD vacancy rate held steady at 18.0% as of January 2025—the highest since 1997. Tenant demand remains concentrated in energy-efficient prime buildings as employers seek to create attractive environments that encourage employee return-to-office (RTO) participation.
Vacancy Snapshot: Melbourne Submarkets Under Pressure
UPA reported that unlike CBD stabilisation, outer Melbourne office precincts are continuing to deteriorate.
- St Kilda Road: Office vacancy increased to 29.3%.
- Southbank: Office vacancy rose to 17.6%, nearly double its 10-year average.
- Metropolitan markets: Office vacancy climbed to 15.2%, more than double the long-term average.
While development activity has slowed, oversupply remains a concern. Of the 95,000 sqm of metro projects under construction, only 21% is pre-committed. The City Fringe alone accounts for 71% of this pipeline, indicating future pressure in decentralised markets.
Major completions, such as 7–23 Spencer Street (46,000 sqm) by Mirvac and 51 Flinders Lane (29,000 sqm) by GPT, are expected in early 2026. However, rising construction costs and tightening financing conditions are projected to curtail future development starts.
Market Metrics: Rents, Incentives, and Vacancy Rates
The following table provides a comparative summary of effective rents, incentives, and outgoings by office grade in Q1 2025.
|
Metric |
Premium Grade |
A-Grade |
|
Net Effective Rent (YoY) |
$454/sqm p.a. (+2.0%) |
$370/sqm p.a. (–7.1%) |
|
Incentives |
46.8% (stable) |
48.6% (↑ from previous) |
|
Average Outgoings |
$230/sqm (↑ 3.6%) |
$217/sqm (↑ 10.5%) |
|
CBD Vacancy Rate |
18.0% |
18.0% |
|
St Kilda Rd Vacancy |
29.3% |
No data available |
|
Southbank Vacancy |
17.6% |
No data available |
Premium assets are performing better, with net effective rents rising modestly. Meanwhile, A-grade rents are declining due to higher incentives and operational costs. Tenant demand is consolidating in quality assets while landlords of secondary space struggle to remain competitive.
Yield Consolidation and Investment Trends
Yields in Melbourne’s office market began to show signs of stabilisation in Q1 2025, following expansion during the recent interest rate hike cycle. According to Cushman & Wakefield:
- Premium-grade yields: 6.00% – 6.25% (avg. 6.13%)
- A-grade yields: 6.80% – 7.30% (avg. 7.00%)
- Secondary yields: 7.50% – 8.00% (avg. 7.75%)
Investment volumes remained subdued during the quarter. Cushman & Wakefield reported that $106.7 million in office assets were transacted in Q1 2025, while UPA estimated a slightly higher figure of $114 million. Melbourne is on track for its lowest annual office sales in two decades.
Most transactions occurred outside the CBD, and individual deals rarely exceeded $20 million. Investor sentiment continued to be cautious due to high office vacancy rates and elevated debt servicing costs. The only significant CBD transaction in the quarter was Salta Properties’ $40 million sale of ASF House to CSC.
ESG as a Value Driver & 2025 Outlook
Despite weak investor activity, early indicators suggest a potential for a gradual recovery in late 2025. Recent interest rate cuts and renewed confidence in the Australian economy are encouraging signs. Investors are increasingly targeting ESG (Environmental, Social and Governance) compliant, prime-located buildings with secure tenant covenants and low capital expenditure needs.
Environmental performance and ESG alignment have become core investment criteria, particularly as corporate occupiers emphasise sustainability in leasing decisions. This trend is helping support demand and valuation for green-certified office assets.
