Melbourne’s CBD office market has demonstrated renewed resilience, with vacancy edging slightly lower despite the completion of two major office developments as tenant demand remains strong, according to Knight Frank’s latest Melbourne CBD Office Market Report.
Over the last 12 months, Melbourne recorded net absorption of more than 54,808sq m, the strongest annual result since 2019 and the strongest of any CBD office market nationally.
At the same time, more than 76,000sq m of new office space was added to the market through the completion of 7 Spencer Street and 51 Flinders Lane. Despite this additional supply, CBD vacancy fell marginally to 18.9%.
Knight Frank Partner, Head of Research and Consulting, Victoria, Dr Tony McGough, said the market’s ability to absorb new stock while still reducing vacancy highlights a meaningful shift in occupier demand.
“The standout result this half has been the market’s capacity to absorb significant new supply without vacancy increasing,” he said.
“Historically, the completion of more than 70,000 square metres of office space would have placed upward pressure on vacancy. Instead, strong tenant demand, with some help from building withdrawals, has offset these additions, signalling improving underlying market fundamentals.
“What’s becoming increasingly clear is that Melbourne is no longer one office market. The gap between the best-performing and weakest-performing precincts has never been wider, with occupiers continuing to prioritise premium buildings and well-connected locations.”
The Knight Frank report found rental growth remains highly concentrated in the city’s most sought-after precincts.
The Eastern Core continues to lead net absorption, and prime rents in this precinct increased substantially over recent years to now sit more than double levels recorded in Flagstaff and around 40% above the next highest precinct, the Western Core, illustrating the ongoing flight-to-quality trend.
Knight Frank forecasts that incentives, which currently average 48.1% across Melbourne’s prime market, are approaching their peak and are expected to stabilise through 2027 before gradually declining as the development pipeline reduces significantly.
With face rents forecast to continue rising and incentives beginning to moderate, net effective rents are projected to grow by an average of 5.3% per annum through to 2031. Growth is expected to accelerate as supply tightens as we head into the 2030s.
Knight Frank Partner, Joint Head of Office Leasing, Victoria, Simon Hale, said occupiers are increasingly recognising that current leasing conditions may represent the most favourable window before market dynamics shift.
“We’re seeing a growing number of tenants acting earlier in their accommodation planning as they recognise the supply outlook is changing,” he said.
“While incentives remain attractive today, the amount of future office development is becoming increasingly limited. Once the current pipeline is delivered, businesses looking for large, high-quality accommodation options may find there is considerably less choice available.
“This is particularly evident in the best-performing precincts, where near term availability is tightening more quickly than headline market figures would suggest.”
Knight Frank noted that upon completion of 435 Bourke Street later this year, there is effectively no meaningful speculative office supply expected in Melbourne’s CBD for several years, creating the conditions for stronger rental performance as occupier demand continues to recover.
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