Melbourne office tenants urged to act as supply window closes

Commercial

Melbourne CBD office tenants are being urged to secure space quickly as tightening supply and rising rents shift market conditions back in favour of landlords.

According to Knight Frank's latest Melbourne Insights report, a clear turning point is coming in the market with occupier demand strengthening, net absorption returning to positive territory and new supply set to sharply decline. This is creating mounting pressure on availability, particularly for premium, large-format office space.

Since the beginning of 2025, 62 per cent of occupiers leasing more than 1,000 square metres have either expanded or maintained their footprint, signalling the end of widespread contraction seen in the post-pandemic period.

Knight Frank Partner, Head of Research and Consulting Victoria, Dr Tony McGough, said the data shows a decisive turnaround in occupier behaviour.

"The data shows a decisive turnaround in occupier behaviour, with demand trending upward since 2013 and turning positive in 2025, as Melbourne's CBD recorded net absorption of 29,000 square metres last year - its strongest rate since 2018," Dr McGough said.

At the same time, net effective rents in Melbourne's CBD have begun to recover, rising by 4 per cent over 2025, the strongest annual growth since 2019, with further increases forecast as incentives gradually unwind.

Knight Frank Analyst, Research & Consulting, Laurence Panozzo said the dynamics are changing.

"The dynamics in Melbourne CBD office market have shifted quickly, with demand accelerating, which is set to place upward pressure on pricing for occupiers," Mr Panozzo said.

The research found incentives are expected to remain elevated but fall from their peaks to average 45 per cent by 2030. Consequently, net effective rents are expected to grow at an average annual rate of 5.3 per cent over the next five years, while face rents will rise by 4.2 per cent over the same period.

The tightening conditions are being amplified by a looming supply shock, with Melbourne's CBD set to experience its most significant slowdown in new office development on record. After 2026, there will be no major office projects under construction, with average annual completions forecast to fall to around 34,000 square metres over the next five years.

While this year's new supply is expected to push vacancy up to 20 per cent, this is expected to represent the peak, with vacancy forecast to fall swiftly thereafter. By 2030, the vacancy rate is forecast to sit at 13 per cent, with premium vacancy closer to 8.5 per cent.

Knight Frank Partner, Joint Head of Office Leasing Victoria, Simon Hale, said the supply outlook was creating urgency, particularly for large occupiers with specific requirements.

"Despite relatively high vacancy on paper, the reality for tenants, especially those seeking high-quality, contiguous space, is very different," Mr Hale said.

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