Office vacancies across CBD markets throughout Australia have reached new 29-year highs as a slew of new developments which have come online have meant that tenants searching for new space have been spoiled for choice.

And lower grade stock is being impacted as tenants demand quality spaces.

The Property Council of Australia has released the July edition of its Office Market Report.

According to the report, the overall CBD office vacancy rate increased from 13.7 percent in January to 14.3 percent in July.

This represents the highest level of vacancies since July 1996.

Primarily speaking the result was driven by new supply.

Over the past six months, a total of 200,000 sqm of new office space has been added.

This has offset modest but improving levels of tenant demand (see chart).

Looking closer, the results indicate a ‘flight to quality’ as tenants seek better working environments for their staff.

Occupancy levels for Premium grade stock increased by 2.7 percent during the past six months and are up by 7 percent over the past year.

By contrast, occupancy levels barely changed (+0.1 percent) for A grade stock and fell by -0.5 percent, -0.3 percent and -0.4 percent for B, C and D grade stock respectively.

The latest data reflects a longer-term shift which has taken place within Australian office markets over the past five years.

This has seen the national CBD  vacancy rate increase from around 8 percent at the start of the pandemic to its current rate of 14.3 percent (see chart).

This is being driven by new supply and subdued (but improving) tenant demand.

In terms of supply, the market has seen 2.6 million sqm of new office space become available over the past five years.

This represents 13.7 percent of overall supply across the nation’s cities.

It follows a building boom which saw a high number of project commencements in the years leading up to the pandemic.

Regarding demand, leasing activity plummeted across 2022 and 2023 as the full impact of the pandemic (including working from home) and higher interest rates began to flow through.

Whilst demand is starting to improve, leasing activity remain subdued by historic standards (see chart).

Particularly impacted has been Melbourne, which now has the highest level of CBD vacancy at 17.9 percent.

In addition to new stock offerings, the Victorian capital was disproportionately impacted by COVID lockdowns and work from home mandates.

With barely any net positive demand over the past six months, the city’s office market is still struggling.

Elsewhere, CBD vacancies are highest in Perth (17 percent), Adelaide (15 percent), Sydney (13.7 percent) and Brisbane and Canberra (10.7 percent each).

Whilst current conditions are favourable for tenants, however, it is likely that the market may shift back in the opposite direction going forward as below average levels of supply are slated to come online across each of the next three years.

Office demand turns positive but remains subdued

Optimism returns

Commenting on the report, Property Council of Australia chief executive officer Mike Zorbas projected an optimistic approach.

Zorbas said that the new supply over the last few years is part of a refresh of office spaces in our cities as tenants demand higher quality spaces.

“The continuous supply of new high-quality office space in our CBDs is a response to businesses searching out great places for their employees to work in,” Zorbas says.

“Tenants are capitalising on opportunities to occupy premium buildings in prime CBD locations, with premium space continuing to see higher demand levels than lower-grade buildings.

“We have seen a year and a half of positive demand for office space, with more businesses taking up office space than leaving behind.”

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