Office markets have tightened further in the already strong markets of Sydney and Melbourne even as conditions in resource affected capitals have become more favourable to tenants, a new report shows.

Releasing its latest office market report, the Property Council of Australia said the national office vacancy rate across all capitals contracted slightly from 10.5 per cent in January to 10.4 per cent in July.

Whilst vacancies continued to blow out in cities such as Brisbane, Perth and Adelaide, those in Sydney fell from 6.3 per cent to just 5.6 per cent, whilst those in Melbourne contracted from 7.8 per cent to 7.0 per cent amid massive levels of demand and a spike in withdrawals in the former market and high levels of withdrawals in the latter.

Throughout Sydney, conditions in the office market have strengthened as a strong economy has underpinned healthy levels of demand and the booming apartment market has seen high levels of stock withdrawn for residential conversion purposes.

Net absorption over the last six months has been running at almost twice its level of historic averages as buyers have snapped up significant volumes of Premium Grade stock.

Whilst healthy levels of new supply came onto the market, meanwhile, this has largely been offset by around double the normal levels of withdrawals, mainly due to residential conversion.

Going forward, the market appears likely to be challenged over the immediate term as projects such as Tower 1, International Towers Sydney and 10 Shelly Street drive above average additions to supply over the second half of 2016 and into the first half of 2017. Over the longer term, however, vacancies may well tighten further after that as the long term pipeline of stock is extremely limited.

In Melbourne, meanwhile, vacancies fell on the back of net supply withdrawals notwithstanding that demand growth has weakened.

Whilst higher levels of stock are available in areas like Spencer Street, Western Core, Flagstaff and the North East, conditions are tight in sought after locations such as Docklands, Civic and the Eastern Core.

Despite slowing demand, conditions are expected to tighten further going forward as no new stock additions are anticipated to occur within the second half of this year and the longer term pipeline is extremely limited.

Across other capitals, however, vacancy rates have blown out in Brisbane notwithstanding improving levels of demand as massive volumes of new supply have flooded the market, whilst Perth and Adelaide have seen both falling demand and increasing supply.

On a national scale, the signs appear to suggest that conditions will become more favourable to tenants going forward notwithstanding previous comments about Melbourne and Sydney as current levels of demand are tracking at around half historic averages and around 520,000 square metres of new stock is expected to be added over the next six months – 60 per cent above normal levels.

Property Council of Australia chief executive officer Ken Morrison said the latest results demonstrated a mixed bag of conditions across the country.

“There is no compelling Australian story in this report,” Morrison said. “What we are seeing is a major divergence of performance between the states, between CBD and non-CBD markets and in the supply outlook for each city.”