Office vacancies have peaked, set to decline in 2025

AUSTRALIA’S CBD office vacancy rate rose marginally due to continued new supply of space, but a recovery is on the cards for 2025 as demand across the capital cities improve.

According to the latest Property Council of Australia Office Market Report, the vacancy rate increased marginally from 13.6% to 13.7% over the six months to January 2025, despite positive demand in four capitals.

The CBD net absorption over the period was 49,311 sqm, however it was offset by 221,817 sqm added.

The non-CBD office vacancy rate was unchanged at 17.2% whilst the combined rate for both the CBD and Non-CBD markets nudged up by 0.1% to 14.7%. Sublease vacancy decreased in both the CBD and Non-CBD markets. Only Melbourne and Brisbane recorded a sublease vacancy above their historical averages.

Property Council chief executive Mike Zorbas said the new supply added was near the historical average of over 237,000sqm.

“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. 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.

“High levels of supply show that businesses still call our CBDs home as they balance flexible working arrangements with face-to-face contact in the office,” he added.

JLL Australia head of office leasing Tim O’Connor said office spaces are continually being refined.

“We’re continuing to witness a reset in workplace norms across the Australian market. Popular business hubs are evolving to meet changing needs, driving sustained demand.

“Office spaces are continually being refined to support productivity, collaboration, and employee wellbeing, where the quality of workspace directly impacts talent attraction and retention.

“As businesses continue to refine their workplace strategies, we anticipate sustained demand for higher quality office spaces that offer adaptability and enhanced employee experiences. The focus is increasingly on creating environments that support the evolving needs of modern businesses and their workforce,” he said.

Cushman & Wakefield’s head of office Leasing, Australia and New Zealand, Tim Molchanoff said flight to quality continues to drive significant demand for central core assets.

“This will further fuel rental growth across the country, in which we expect Sydney core and Brisbane to outperform the other markets. A tight labour market and an expanding white-collar workforce will fuel additional demand across most of our major markets,” Molchanoff said.

Knight Frank national lead of leasing Andrea Roberts said fitout, construction costs and interest rate levels prove to be the headwinds to discourage tenant moves, with landlords prudently allocating capital due in the current economic environment.

“Where good quality existing fitouts are available, it is financially compelling to tenants to stay put or achieve a double deal, but only if the fitout that is existing or inherited is of a sufficient high quality and has suitability to their business,” she added.

CBRE Pacific head of investor leasing Tim Courtnall said given higher fitout costs and a shrinking supply of contiguous Prime Grade floors, he is forecasting fewer 5,000sqm+ relocation transactions, with activity to be dominated by 1,000sqm to 3,000sqm occupiers.

“Contributing to this is the fact that some occupiers in good quality assets with a reasonable fitout are opting to complete cosmetic upgrades to avoid relocation disruptions. For example, only about 25% of 5,000sqm+ Sydney CBD tenants with upcoming lease expiries made decisions to relocate in 2024,” said Courtnall.

CBRE Australia head of office and capital markets research Tom Broderick believes the vacancy rate will peak in 2025 and begin to decline.

“Sublease availability is at its lowest level since 2019, indicating that contractionary tenant moves are becoming less common. We’d expect the return to office to continue to improve this year, particularly given changes from US firms in recent times. While the upcoming Australian Federal election may introduce some uncertainty in leasing activity, certain sectors are expected to return to a growth phase in 2025.

“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,” he added.

Looking ahead, Colliers managing director of office leasing Australia Cameron Williams said contraction of the new supply pipeline will be a defining factor for market recovery over the course of the year, as development feasibility remains under pressure.

“With a lack of new Premium or high-end A grade supply in core locations being developed, we expect some tight conditions to start to emerge by the end of 2025 in these pockets of the market. This will allow for effective rents to recover as incentive levels start to taper where limited vacancy exists,” he added.

Meanwhile the OMR shows vacancy rates continue to diverge with Adelaide and Perth recording decreases, Melbourne remaining steady, whilst Sydney and Brisbane rose due to new supply.

Sydney

Sydney’s office vacancy rate increased from 11.6% to 12.8% driven by 164,552 sqm of new supply being added, well above the historical average of 74,361 sqm.

CBRE NSW head of office leasing Rachel Vincent said despite this, gross face rents continue to climb.

“The average gross CBD rental rate currently sits at $1,771 AUD/sqm and we anticipate this upward trend to continue across most markets. It is also worth noting that outgoings are increasing amid higher land tax, electricity and insurance costs,” said Vincent.

Cushman & Wakefield’s head of office leasing, NSW, Tim Stanway, said 2024 was as a tale of two halves with the first half witnessing a significant portion of tenant enquiries and demand directed towards the CBD core and in the second half, it went beyond the CBD core, particularly in Midtown and Western Corridor Precincts.

“Looking towards 2025, we foresee stronger business and tenant confidence driven by anticipated interest rate cuts in the first half of the year. With new supply improving quality across the market, we expect a steady rise in rents throughout the year. Combined with better economic conditions and a recovery in capital markets, the outlook for Sydney’s CBD in 2025 is considerably brighter compared to last year.” Stanway said.

Knight Frank NSW head of office leasing Al Dunlop said the Sydney market is now entering the end of the supply curve.

“2025 is off to a positive start with circa 50,000 sqm of enquires recorded for the month of January. With the exception of 33 Alfred Street (approaching 100% leased) there are no new supply additions until 2027,” said Dunlop.

Melbourne

Melbourne’s vacancy rate remained stable at 18%. Zorbas said Melbourne continues to have the highest CBD office vacancy in the country.

But Cushman & Wakefield’s national director, office leasing Victoria, Marc Mengoni, believes the market will rebound this year as incentives have peaked.

“For the time being, market conditions are favourable for active tenants and most are discovering not only can they afford better quality offices, situated on major transport hubs, but in some cases actually reduce costs,” he added.

Knight Frank Victorian head of office leasing Hamish Sutherland noted that prime net face rents increased by 0.2% over the last quarter after only two buildings in Melbourne’s basket registered rental growth.

“Incentives remained flat for the second half of 2024 after rising 100 basis points in Q2 2024; this plateau has allowed net effective rents to return positive year-on-year growth at 0.8%, the first time since Q1 2023.

“The development pipeline in the CBD slowed in 2024 and will remain constrained in 2025, with only two new developments forecasted to complete by the end of the year. Most of the forthcoming supply in 2025 is refurbished stock. A recovery in net absorption could be possible later in the year as the economy strengthens which may see the vacancy rate fall but not by much,” said Sutherland.

CBRE Victorian head of office leasing Ashley Buller said while tenant demand, as measured through enquiry volumes, was down by around 10% in 2024 compared to 2023, there was a higher conversion rate of enquiries to deal transactions.

“Tenants are now coming to market earlier, driven by caution around delays in lease negotiations and fit-out works. Most requirements remain in the sub-500sqm market, with a notable increase in average tenant size above 1,000sqm, indicating larger tenants are regaining confidence in their workplace needs. We also saw 78% of enquiries seeking A-Grade space and 75% of enquiries below 1,000sqm seeking fitted space.

“We believe the headline vacancy rate for Victoria is at, or has passed, its cyclical peak. While vacancy rates will remain elevated in the short-term, due to recent and upcoming completions and below-average pre-commitments, we are positive about the outlook for 2025 which will be driven by larger tenants making commitments, tenants continuing to centralise and rising occupancy rates,” said Buller.

Colliers VIC national director of office leasing Michael Darvell said encouragingly for Melbourne’s CBD there has been strong tenant and occupier activity over the past 12 months.

“Colliers experienced historic levels of enquiry and gross leasing activity through 2024 with 600,360 sqm of enquiry by area across the CBD. This has translated to the highest level of lease commitments over the last four years with 165,000 sqm transacted. Furthermore, there is a sizeable area of space in advanced negotiation across the CBD, particularly within the Eastern Core, which sets the CBD up for a positive start to 2025,” he added.

Brisbane

Brisbane’s vacancy rate rose from 9.5% to 10.2%, but that is expected to be short-lived.

Colliers Qld national director office leasing Matt Kearney said despite the increase, the rate remains the lowest level since January 2013.

“Despite this increase, vacancy is expected to decline later this year as major tenants move into the CBD and new supply remains constrained, with no additional uncommitted stock anticipated. Surprisingly, six-month net absorption was recorded at -12,646 sqm, with some notable contractions. Among the largest were at 266 George Street, where Australian Retirement Trust reduced its footprint by 4,428 sqm, and at 149 Adelaide Street, where Services Australia vacated 2,992 sqm ahead of its move into a new building under construction at 205 North Quay,” he added.

Jack Neumann, Cushman & Wakefield’s manager – office leasing, QLD said with only one major refurbishment and no new additions during 2024 and with new completions expected until the second half of 2025, the vacancy rates will tighten to levels not seen in the CBD since 2012.

“Following practical completion of 205 North Quay and 360 Queen Street, we expect vacancy to drift upwards slightly, but with most of the space already pre-committed and backfill space accounted for, the drift will be minimal.

“Demand remains strong for high quality office space in the CBD, while options are still available, suitable options accommodating tenant demands are becoming increasingly limited. With inquiry levels remaining high and space options constrained by tightening vacancy, face rents are expected to continue rising, especially for prime assets. Although rental growth may not reach the peaks of previous years, we still expect very strong growth through 2025.” Neumann said.

Knight Frank Qld head of office leasing Mark McCann said there are many tenants, particularly with requirements of 1,000 sqm or less, gravitating towards existing fitouts to save on costs.

“However, across the board access to capital challenges from both occupiers and owners to complete new fitouts or modify existing fitouts has contributed to higher volumes in lease renewals, particularly in the second half of 2025.

“While several major professional services firms in the CBD have relocated and upgraded to new accommodation, towards the end of 2024 we saw a growing trend towards tenants choosing to re-sign where they are and not undertake the major capital works of a relocation. This is symptomatic of the wider mood with greater conservatism and preservation of capital due to economic conditions,” McCann said.

Perth

Perth’s vacancy decreased from 15.5% to 15.1%.

Roly Egerton-Warburton, Cushman & Wakefield’s national director, head of office Leasing, WA said Perth continues to experience an extremely tight labour market, so major occupiers continued the flight to quality trend to help them compete for the best staff.

“Net rents have seen significant growth, with incentives stable. Office occupancy remains the strongest in the country, with ‘back to the office’ a major theme.

“Fitted space continues to dominate the leasing landscape, as tenants seek to save time and capital. Construction costs seem unlikely to correct in the foreseeable. State and Federal Government tenants remain highly active, and mining continues to propel the economy, and as a result, drive many of the CBD’s major lease transactions,” he noted.

JLL Research also show the Perth CBD recorded annual net absorption of 11,300 sqm in 2024 – the fourth successive year of positive net absorption.

Adelaide

Adelaide’s dropped from 17.5% to 16.4%.

Adam Hartley, Cushman & Wakefield’s head of office leasing – SA, said the flight quality seen in 2024 will continue in 2025.

Refurbished second grade and new buildings are being sought and landlords are investing in their buildings to cater to these demands.

“Fringe and Metro markets are showing similar signs, resulting in lower levels of A grade stock and an opportunity for these landlords to proactively upgrade their assets. The need for fitted space broadens, due to the high cost of construction and shorter lease terms making traditional leasing deals challenging.

“Ongoing demand in 2025 will reduce vacancy levels across the new and quality refurbished assets. 2025 is a great time for tenants to take advantage of the higher vacancy rates due to the recent completion of new office towers. Reduced new stock pipeline will result in reduced vacancy and reduction on quality fitted office accommodation. Effective rental rates should improve for building owners in late 2025 and into 2026, as vacancy rates decline,” he said.

According to JLL Research, Adelaide’s annual demand exceeded 40,000 sqm for the second successive year. JLL head of research – Australasia, Andrew Ballantyne said the strength of the Adelaide office market is a function of having exposure to growth sectors of the South Australian economy.

CBRE SA head of office leasing Andrew Bahr said the uptick in leasing activity not only highlights the growing demand for A Grade office spaces in Adelaide but also reflects the successful transformation of these properties into desirable work environments.

“We saw some larger enquiries in the second half of 2024, those being SA State Government for 8,000-14,000 sqm, Australian Tax Office for 19,000 sqm and People First Bank for 5,000-6,000 sqm.

“With limited space available in Gen2 and Gen3 stock for the foreseeable future, increasing levels of demand and little new supply, rental growth is expected to continue into 2025,” Bahr predicted.

Canberra

Canberra’s office vacancy rates fell from 9.5% to 9.2%.

O’Connor said the Canberra market showed resilience with positive quarterly demand, primarily driven by sub-1,000 sqm tenants from the private sector.

Knight Frank ACT head of agency Nathan Dunn said the Canberra market faces challenges this year due to the upcoming federal election.

“Recent discussions have highlighted a significant increase of 36,000 full-time equivalent positions within the federal bureaucracy. This expansion has been a point of contention, with debates about potential reductions through natural attrition and the expiration of temporary contracts.

“Federal elections can introduce uncertainties in the office leasing market. Policy shifts, administrative changes, and potential restructuring following an election may lead to variations in office space requirements and impact office occupancy rates in Canberra. While specific outcomes depend on election results and subsequent policy implementations, the market often experiences a period of adjustment during and after election cycles,” Dunn said.

Hobart’s vacancy increased from 2.8% to 3.6% – the lowest vacancy rate in the country. Darwin enjoyed the largest decrease in vacancy rates, falling from 14.4% to 11.9%.

Meanwhile the market remains challenging in the near term as the OMR reveals 333,000 sqm of supply due to come online in the next six months, which is well above the historical average of 237,554 sqm.

The bulk of the new supply will be in Canberra (87,011 sqm), followed by Sydney (83,048 sqm), Melbourne (54,327 sqm), Brisbane (43,700 sqm), Perth (41,193 sqm) and Adelaide (23,826 sqm).

In the medium term, Sydney will see 277,048 sqm of supply added by 2027, with almost half of this space pre-committed to.

In Melbourne, 252,627 sqm will come online by 2027 with 26.9% committed to, while Brisbane will see 162,630sqm of new supply with 67.9% pre-committed to.