Conditions in office markets around Australia have stabilised, new data shows.

But vacancy rates in Melbourne continue to blow out.

The Property Council of Australia has released the latest edition of its semi-annual Office Market Report.

Overall, the report shows that CBD vacancy rates edged up only marginally from 13.5 in January percent to 13.6 percent in July.

Over that same period, non-CBD vacancies contracted from 17.9 percent to 17.2 percent.

This represents a welcome stabilisation after vacancies surged over recent years (see chart) – mostly on the back of new supply additions.

Encouragingly, the report reveals that demand has stabilised following a downturn in 2023.

This occurred as the volume of office space that was taken up by tenants marginally exceeded that which was vacated – a situation known as positive net absorption.

The stabilisation in demand comes despite subdued conditions in the Australian economy.

Over the six months to July, vacancies declined across Sydney, Brisbane and Adelaide (see chart). In Brisbane, vacancies fell to less than ten percent for the first time since January 2013.

However, vacancies edged out further in Canberra, Perth and Melbourne on account of new supply additions and falling demand in Perth and Melbourne.

In Melbourne, vacancy rates are now 18 percent as demand has fallen away over the past twelve months.

One reason may be a delayed impact from the pandemic as Melbourne experienced the most significant lockdowns and restrictions and may have seen a more significant shift toward remote work compared with other cities.

That said, the Melbourne market could be in for a reprieve over the near term as projected levels of supply are expected to be lower compared with long-run averages over the next two years.

Going forward, the market could be challenged over the near term as above-historic average levels of supply are projected for Sydney as well as Perth as above-historic average levels of supply are expected over the next six months.

This is particularly the case in Sydney, where additions are expected to be almost double historic averages as projects such as 1 Elizabeth Street (62,871 sqm) and 252 Pitt Street (48,000 sqm) are expected to come online during the September quarter (although below average levels of additions are expected following that as no other major projects are expected to come online until the 8-10 Lee Street project in 2027).

However, supply additions in other capitals are expected to be below average.

Property Council of Australia Chief Executive Mike Zorbas welcomed the latest figures.

“It is pleasing to see vacancy levels fall in half of Australia’s CBDs,” Zorbas said.

“There is room for very cautious optimism in parts of the office market.

“In our CBDs, office supply is continuing to be a driving force for vacancy levels as demand for office space has been positive.

“This demonstrates businesses still see a CBD location as the best place to do business.

“In the last three years, four of the six reporting periods have recorded positive demand for office spaces in our CBDs. In Adelaide and Brisbane, demand is currently 5.9 and 2.7 times their historical averages, respectively.

“We continue to see a preference for high quality office spaces, with Sydney and Adelaide being the only capitals to record higher prime vacancy than secondary vacancy.

“Some of the older, lower-grade office buildings that are in lower demand are now being withdrawn from the market to be repurposed through refurbishments or converted into residential spaces or hotels.

“Of note, Melbourne still faces stiff challenges. The Victorian Government simply has to get some of its workforce back a few days a week to support what must again be a thriving city.”

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