Persistent weakness in Melbourne is keeping Australia’s office vacancy rates at near 30-year highs, new data shows.

And markets will be further challenged over coming months as above-average volumes of new stock come online.

(above image: The skyline of Melbourne, Victoria, Australia in February 2021. Author Ricardo Gonclaves via Flickr. Published under Creative Commons 2.0 license.)

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

According to the report, the overall office vacancy rate across the country edged up by 0.1 percent from 14.6 percent in July to 14.7 percent in January.

This represents the highest vacancy level since July 1995 and is above pre-COVID levels by more than five percent (see chart).

        Australia National Office Vacancy

In terms of CBD markets, vacancies edged up from 13.6 percent in July to 13.7 percent in January.

This came on the back of relatively subdued levels of demand (net absorption of 49,311 sqm). It occurred as new supply additions (220,000 sqm) came in at slightly below the historic average of 237,554 sqm.

That overall demand story, however, masks a significant divergence which is evident between individual cities.

On one hand, four capital CBD markets recorded increasing and above-average levels of net demand (net absorption) over the past six months. These are Sydney, Perth, Adelaide and Canberra – albeit with Sydney’s vacancy rates edging up on account of new supply.

By contrast, demand continued to plummet in Melbourne, which continues to have the highest CBD vacancy rate in the country at 18 percent.

Overall, commercial tenants in Melbourne handed back a net of more than 40,000 sqm in leased space over the six months to January. Only a net withdrawal of almost one percent of the city’s office stock prevented its vacancy rate from blowing out even further.

Since the outbreak of COVID, Melbourne’s office market has been challenged as demand has dropped away at the same time as the city needed to absorb a significant volume of new stock additions.

Whilst most other capitals remained open during most of the pandemic (except for the initial outbreak), Melbourne was subject to seven lockdowns over two years. During this time, many non-essential workers were forced to work from home.

As a result, there are signs that remote working appears to have taken hold to a greater extent in Melbourne compared with other capitals.

In November, CBRE reported that office occupancy levels in Melbourne stood at only 59 percent of pre-COVID levels. This represented the lowest level among major capital cities and was well below the national occupancy rate of 71 percent of pre-COVID levels.

Not surprisingly, this has impacted demand. Overall, commercial tenants have handed back more office space than what they have absorbed in new leases during six out of the last eight semi-annual periods.

In addition, the city’s market has been further challenged as a large volume of stock came online across 2022 and 2023 following a significant development which occurred during the mid to late 2010s.

Outside of CBDs, vacancies in non-CBD markets remained at near 30-year highs at 17.2 percent.

Particularly high vacancies of above 25 percent can be seen in Crows Nest/St Leonards and St Kilda Road.

Going forward, the overall market is expected to be challenged over the next six months as 333,000 sqm of space is expected to come online.

This is well above the historic average of 237,554 sqm.

This supply will be spread out across Sydney (83,048sqm), Canberra (87,011sqm), Melbourne (54,327sqm), Brisbane (43,700sqm), Perth (41,193sqm) and Adelaide (23,826sqm).

       Melbourne has the highest office vacancy level

(Source: Office Market Report, Property Council of Australia, Jan 2025)

Commenting on the longer-term, Property Council of Australia Chief Executive Officer Mike Zorbas adopted an optimistic tone.

“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,” Zorbas said, referring to the fact that overall supply additions have been generally elevated over recent years.

“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.

Speaking of the Melbourne situation, however, Property Council of Australia Victorian Executive Director Cath Evans called for action to help to reinvigorate the CBD.

In particular, Evans would like more public servants to be brought back to offices.

“The Victorian Government has a responsibility to show more active leadership, ensuring Victorian public servants work in the office more often and support a vibrant CBD,” Evans said.

“If we want to remain one of the best cities to visit in the world, we must champion a thriving CBD that supports the businesses that help make our city great.

“While flexible working is a feature of many top organisations, nothing beats regular in-office contact for team building, mentoring, skills growth and productivity.

“The thousands of small businesses that call our CBD home are struggling without the regular foot traffic of office workers to support them.”

Enjoying Sourceable articles? Subscribe for Free and receive daily updates of all articles which are published on our site

Want to grow your sales, reach more new clients and expand your client base across Australia’s design and construction sector?

Advertise on Sourceable and have your business seen by the thousands of architects, engineers, builders/construction contractors, subcontractors/trade contractors, property developers and building industry suppliers who read our stories across the civil, commercial and residential construction sector