Office vacancy rates hold steady despite new supply surge

Australia's office market is showing remarkable resilience as vacancy rates remain relatively stable despite significant new supply entering the market across major cities

According to the latest Property Council of Australia Office Market Report, CBD office vacancy rates experienced only a marginal increase from 13.6% to 13.7% over the six months to January 2025, while non-CBD rates held steady at 17.2%.

This stability comes despite over 220,000 square metres of new office space being added to the market during this period, highlighting the underlying strength of demand for quality office accommodation in Australia’s commercial centers.

National overview of office vacancy rates

The overall stability in national vacancy rates masks some interesting variations across individual markets, with some cities showing improvement while others faced increased vacancy due to new supply. The total vacancy rate for both CBD and non-CBD markets increased by just 0.1% to 14.7%, demonstrating the market’s ability to absorb new supply reasonably well.

Property Council of Australia Chief Executive Mike Zorbas noted the significance of the new supply in contextualizing the vacancy figures. “We have continued to see the supply of new office space above or near the historical average, providing access to a wealth of new, high-quality office space in our cities,” Mr. Zorbas said.

“Vacancy levels continue to be driven by this large level of supply, as demand has remained positive. Over the last three and a half years, positive demand for office space in our CBDs has been recorded in five of the last seven reporting periods. Sydney, Perth, Adelaide, and Canberra saw positive demand for office space above their historical averages in the last six months,” he added.

This positive demand is particularly noteworthy given the continued evolution of flexible working arrangements and ongoing debates about return-to-office policies. It suggests that businesses still value physical office space as part of their operational strategy, even as they adapt to new ways of working.

For investors, the relatively stable vacancy rates indicate resilience in the office sector, offering potential opportunities in markets showing improvement. For tenants, the current environment continues to provide leverage in negotiations, especially in higher-vacancy markets like Melbourne.

City-by-city market analysis

The five major cities showed divergent trends in their office markets, reflecting local supply dynamics and economic conditions.

Sydney’s office vacancy rate increased significantly from 11.6% to 12.8%, primarily driven by 164,552 square metres of new supply being added over the last six months - well above the historical average of 74,361 square metres. Despite this increase, CBRE Head of Office Leasing in NSW, Rachel Vincent, reported that the Sydney leasing market is experiencing strong activity.

“Tenants are carefully deliberating their decisions as many plan for their workforce to return to the office three to five days per week,” Vincent said. “This trend reflects a strategic shift towards optimising workplaces for return-to-work mandates. CEOs recognise the benefits of having their teams together for culture, collaboration, and productivity.”

Melbourne maintained its position as the city with the highest vacancy rate at 18%, prompting calls for government action. “Melbourne continues to have the highest CBD office vacancy in the country. We need to see active leadership from the state government to support the vibrancy of the CBD and help Melbourne remain one of the best cities to visit in the world,” Mr. Zorbas commented.

Despite the high vacancy, CBRE Head of Office Leasing in Victoria, Ashley Buller, expressed optimism about Melbourne’s prospects. “With occupancy rates poised to grow from their current low base of 59%, and white-collar employment growth expected to grow at the highest rate nationally until 2030, we are optimistic about the Melbourne CBD office market’s prospects,” Buller said.

Brisbane’s vacancy rate increased from 9.5% to 10.2%, reflecting new supply entering the market. Meanwhile, several cities showed improvement, with Perth’s vacancy decreasing from 15.5% to 15.1% and Adelaide’s dropping from 17.5% to 16.4%. Canberra also saw improvement, with vacancy rates falling from 9.5% to 9.2%.

Smaller markets showed interesting trends, with Hobart maintaining the lowest vacancy rate in the country at 3.6% (up slightly from 2.8%), while Darwin enjoyed the largest decrease in vacancy rates, falling from 14.4% to 11.9%.

For tenants, these variations create different market dynamics across cities. In Melbourne, tenants retain significant leverage with greater choice and competitive incentives, while in tighter markets like Hobart, options are more limited and landlords maintain stronger negotiating positions.

Return-to-office trends influencing demand

The ongoing evolution of return-to-office policies continues to shape office demand across Australia. As more companies establish clearer expectations around office attendance, the impact on space requirements is becoming more predictable.

CBRE’s Rachel Vincent noted that many companies are now planning for their workforce to be in the office three to five days per week, creating more certainty around space needs. This trend is helping to stabilize demand after several years of uncertainty following the pandemic.

The improving return-to-office rates are particularly significant in Melbourne, which currently has the lowest occupancy levels among major Australian cities at 59%. As these rates improve, they are expected to drive stronger demand and absorption of vacant space.

For occupiers, this evolving landscape means carefully balancing workplace strategies that support both in-office collaboration and flexible working arrangements. Many tenants are using lease renewals as an opportunity to reconfigure their spaces to better support hybrid working models while encouraging more in-office presence.

Sublease vacancy and business confidence

Sublease vacancy, a key indicator of business confidence, showed improvement across both CBD and non-CBD markets. When businesses reduce their sublease space, it typically signals increased confidence in their space requirements and future operations.

CBRE Head of Office & Capital Markets Research in Australia, Tom Broderick, noted this positive trend: “Sublease availability is at its lowest level since 2019, indicating that contractionary tenant moves are becoming less common.”

This decrease in sublease vacancy suggests that the major downsizing that followed the pandemic may have largely run its course, with businesses now having a clearer understanding of their space needs in a hybrid working environment.

Only Melbourne and Brisbane recorded sublease vacancy above their historical averages, while other markets showed more normalized levels. This recovery in sublease metrics is particularly encouraging for landlords who have been competing with tenant-offered space since the pandemic began.

For investors, decreasing sublease availability removes a significant source of competition for direct vacancy, potentially supporting rental growth in markets where sublease space has been absorbed.

Future supply and pre-commitment levels

The outlook for office supply remains strong, with 333,000 square metres set to come online in the next six months, well above the historical average of 237,554 square metres. This new supply will be distributed across major markets, with Sydney expecting 83,048 square metres, Melbourne 54,327 square metres, Brisbane 43,700 square metres, Canberra 87,011 square metres, Adelaide 23,826 square metres, and Perth 41,193 square metres.

Looking further ahead, Sydney is set to see 277,048 square metres of new office supply come online by 2027, with almost half of this space already pre-committed. In Melbourne, 252,627 square metres will come online by 2027 with 26.9% committed, while Brisbane will see 162,630 square metres of new supply with an impressive 67.9% pre-committed.

These pre-commitment levels, particularly in Sydney and Brisbane, indicate strong tenant confidence in these markets and suggest that premium new buildings continue to attract strong interest despite overall market vacancy.

CBRE Head of Investor Leasing for the Pacific, Tim Courtnall, highlighted this trend toward quality space: “A key theme evolving across the country is the diminishing supply in new buildings, with high demand for newer product in all markets, offering superior sustainability credentials and amenity. I expect to see this theme gain momentum and given the higher focus on sustainability credentials and workplace, Prime Grade buildings in core locations will exponentially outperform secondary buildings over the next five years.”

For investors, this flight to quality creates a bifurcated market where premium assets with strong sustainability credentials may outperform, while secondary buildings face increasing challenges in attracting and retaining tenants.

Sustainability driving tenant preferences

Sustainability has emerged as a critical factor in tenant decision-making, influencing both new developments and refurbishment strategies for existing buildings. As corporate sustainability commitments intensify, buildings with strong environmental credentials are increasingly attractive to tenants.

This trend is particularly evident in the pre-commitment levels for new developments, which typically offer superior environmental performance compared to older buildings. According to CBRE, buildings with high NABERS energy ratings and strong sustainability features are commanding premium rents and experiencing lower vacancy rates compared to less efficient properties.

For building owners, this trend underscores the importance of investing in sustainability upgrades to remain competitive in the current market. For tenants, especially those with corporate ESG commitments, buildings with strong environmental credentials offer both operational benefits and alignment with sustainability goals.

Expert outlook for 2025 and beyond

Industry experts remain cautiously optimistic about the future of Australia’s office markets, despite current challenges.

CBRE’s Tom Broderick provided a forward-looking assessment: “We expect that national vacancy will peak in 2025 and begin to decline. The supply outlook has declined due to feasibility issues from high construction costs and interest rates. However, there will be above average supply delivered in 2025 in markets like Brisbane and Canberra.”

Rental growth is expected to vary significantly across markets, with Sydney and Brisbane positioned to lead. “We expect Sydney and Brisbane to lead the country from a rental growth perspective this year. However, other markets should record some moderate growth, given the high new development rents are making existing buildings look relatively affordable,” Broderick said.

The upcoming Australian federal election may introduce some uncertainty in leasing activity, though certain sectors are expected to return to a growth phase in 2025. Additionally, the continued improvement in return-to-office rates is expected to support market fundamentals.

Tim Courtnall noted: “Looking ahead, we expect improving conditions in all core leasing markets, with sublease vacancy rates decreasing, expected face rental growth and stronger confidence in the overall economy. Supporting these broader themes, organisations are mandating staff returning to the office, which will improve sentiment and we could see headcount growth back on the table.”

Australia’s office market continues to demonstrate resilience in the face of significant new supply and evolving workplace practices. The stability in vacancy rates, decreasing sublease space, and strong pre-commitment levels for future developments all point to an underlying strength in the market.

While challenges remain, particularly in markets like Melbourne with persistently high vacancy, the overall trend suggests that quality office space continues to play a vital role in business operations. As CBRE’s Tim Courtnall noted, “Flight-to-quality and flight-to-amenity remain key priorities for occupiers,” indicating that well-located, high-quality office buildings with strong sustainability credentials will likely outperform in the coming years.

For investors and occupiers alike, the current market presents both challenges and opportunities, with tenant-favorable conditions in some markets balanced against strong prospects for premium assets and improving fundamentals overall. As the market continues to evolve, understanding the nuances of each city and asset class will be crucial for successful investment and occupancy strategies.

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