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Knight Frank says Melbourne CBD office demand has turned, rents are recovering and new supply is about to fall to record lows. Tenants with large or premium needs should move early.
Melbourne CBD office tenants are being urged to secure space early. Knight Frank says demand has turned positive, net effective rents rose 4% in 2025 and new office supply will fall to record lows after 2026. Vacancy is expected to peak at about 20% this year, then fall to 13% by 2030, shifting conditions back toward landlords.
Tightening supply and rising rents are shifting market conditions back in favour of landlords.
According to Knight Frank’s latest Melbourne Insights report, a clear turning point is coming in the market with occupier demand strengthening, net absorption returning to positive territory and new supply set to sharply decline. This is creating mounting pressure on availability, particularly for premium, large-format office space.
Since the beginning of 2025, 62% of occupiers leasing more than 1,000 square metres have either expanded or maintained their footprint, signalling the end of the widespread contraction seen in the post-pandemic period.
Demand has turned
Knight Frank Partner, Head of Research and Consulting Victoria, Dr Tony McGough, said the data shows a decisive turnaround in occupier behaviour.
“The data shows a decisive turnaround in occupier behaviour, with demand trending upward since 2013 and turning positive in 2025, as Melbourne’s CBD recorded net absorption of 29,000 square metres last year - its strongest rate since 2018,” Dr McGough said.
Net absorption measures how much occupied space changed over the year. A positive figure means tenants took up more space than they handed back.
Rents are recovering
At the same time, net effective rents in Melbourne’s CBD have begun to recover, rising by 4% over 2025, the strongest annual growth since 2019, with further increases forecast as incentives gradually unwind.
Knight Frank Analyst, Research & Consulting, Laurence Panozzo said the dynamics are changing.
“The dynamics in Melbourne CBD office market have shifted quickly, with demand accelerating, which is set to place upward pressure on pricing for occupiers,” Mr Panozzo said.
The research found incentives are expected to remain elevated but fall from their peaks to average 45% by 2030. Consequently, net effective rents are expected to grow at an average annual rate of 5.3% over the next five years, while face rents will rise by 4.2% over the same period.
Face rent is the headline rent in a lease. Net effective rent is what the landlord earns once incentives such as rent-free months and fit-out contributions are counted. As incentives shrink, net effective rents rise faster than face rents, which is what Knight Frank’s forecasts show.
A looming supply shock
The tightening conditions are being amplified by a looming supply shock, with Melbourne’s CBD set to experience its most significant slowdown in new office development on record. After 2026, there will be no major office projects under construction, with average annual completions forecast to fall to around 34,000 square metres over the next five years.
While this year’s new supply is expected to push vacancy up to 20%, this is expected to represent the peak, with vacancy forecast to fall swiftly thereafter. By 2030, the vacancy rate is forecast to sit at 13%, with premium vacancy closer to 8.5%.
| Measure | Figure |
|---|---|
| Net absorption, 2025 | 29,000 sqm, strongest since 2018 |
| Net effective rent growth, 2025 | 4%, strongest since 2019 |
| Occupiers over 1,000 sqm expanding or holding space since 2025 | 62% |
| Forecast vacancy peak, this year | about 20% |
| Forecast vacancy, 2030 | 13% (premium about 8.5%) |
| Forecast incentives, 2030 | average 45% |
| Net effective rent growth, next five years | 5.3% a year |
| Face rent growth, next five years | 4.2% a year |
| Average annual completions, next five years | around 34,000 sqm |
Knight Frank Partner, Joint Head of Office Leasing Victoria, Simon Hale, said the supply outlook was creating urgency, particularly for large occupiers with specific requirements.
“Despite relatively high vacancy on paper, the reality for tenants, especially those seeking high-quality, contiguous space, is very different,” Mr Hale said.
What it means for businesses and investors
For businesses with a lease expiring in the next two to three years, the message is to start early. Larger tenants and those wanting premium or contiguous space have the least room to wait, as that segment is forecast to tighten fastest.
Some smaller businesses will weigh up buying rather than leasing, particularly strata offices in the CBD fringe or suburbs, including Melbourne’s west. Owning gives cost certainty and an asset, but needs a deposit and leaves you with the maintenance and vacancy risk when you move on.
For investors, Knight Frank’s forecasts point to recovering income for quality office assets. Office returns still vary widely, as our article on commercial property returns explains, and our earlier reports on office vacancy holding steady despite new supply and premium office property growth give context. If you’re fitting out a new space, see retail vs office fit-outs.
A broker can compare commercial property loans for owner-occupiers and investors, and business equipment loans can fund the fit-out and equipment for a new office. Attain Loans is a mortgage and commercial finance broker in Melbourne’s west, and any loan is subject to each lender’s assessment.
This article is general information only and doesn’t take into account your objectives, financial situation or needs. Consider whether it’s appropriate for you and speak with a licensed professional before making a decision.
Further questions
What is the office vacancy rate in Melbourne's CBD?
Are Melbourne office rents rising?
What is the difference between face rent and net effective rent?
What does net absorption mean?
Should my business lease or buy office space?
This is general information only and is subject to change at any given time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.
