Australian office market splits as prime vacancy shrinks

However, in older or less desirable buildings, it is expected to barely budge, slipping from 15.8 per cent to 14.4 per cent over the same period.

That widening gap is at the heart of a looming problem: plenty of office space may remain empty, but the pool of modern, well-located buildings that businesses actually want is getting tighter.

CBRE research manager Cameron Douglas-Perrine says several factors are contributing to the divide, including fewer new offices being built, stronger demand for higher-quality space while older buildings remain empty, and there is limited availability in some of the most sought-after locations and building types.

Douglas-Perrine says the shift towards newer, better-located and higher-quality offices is “undoubtedly the major driver of the mismatch”.

Flight to quality gap

At the centre of the shift is what the property industry calls the “flight to quality”, with businesses increasingly favouring newer, better-located and higher-quality offices even when cheaper space is available elsewhere.

“The level of bifurcation differs between cities,” Douglas-Perrine says, and Melbourne provides a particularly clear example. In the CBD, 57 per cent of all vacant office space is concentrated in just 10 per cent of buildings, according to CBRE, meaning a relatively small group of properties accounts for more than half of the empty space.

At the other end of the market, businesses looking in some of Melbourne’s most sought-after areas can have far fewer choices than the overall vacancy rate suggests.

Douglas-Perrine points to Melbourne’s “eastern core”, which has about 600,000 square metres of office stock and a vacancy rate of around 15 per cent.

Despite that seemingly high figure, he says there are “only a handful of options available to tenants currently”.

It is a useful example of why headline vacancy rates can be misleading. A city might have a large amount of empty office space, but that does not necessarily mean businesses can easily find the size, quality and location that suits them.

Stalled development pipeline

The other major pressure is coming from the development pipeline, with fewer new offices being built just as demand becomes more concentrated at the higher-quality end of the market.

Douglas-Perrine says the slowdown in development is “almost the sole [factor] driving future supply constraints on a national level”.

The problem largely comes down to the cost of building.

Construction costs have risen significantly in recent years, meaning developers need to charge higher rents to make new projects financially worthwhile. But the rents businesses are currently paying have generally not risen enough to make many proposed developments stack up.

“The gap has widened significantly over the last several years, largely owing to the rise in construction costs, while rental growth has mostly been subdued in the years following the pandemic,” Douglas-Perrine says.

That has resulted in some developments being delayed or not proceeding at all, reducing the amount of new office space expected to reach the market over the coming years.

Importantly, Douglas-Perrine says the slowdown is not simply due to more recent economic uncertainty.

“This slowdown in development activity was already emerging in 2024-2025, before economic uncertainty rose to [current] levels,” he says.

Melbourne is something of an exception in the short term, with more existing space expected to return to the market as businesses move between buildings. Across the country more broadly, however, the pipeline of new offices is becoming increasingly limited.

Two-speed market emergence

Converting office buildings into apartments, hotels or other uses is sometimes suggested as another reason office supply could tighten, but Douglas-Perrine says Australia is not seeing enough conversions or withdrawals for them to be a major national factor.

Instead, he says changing tenant expectations are already creating the type of divided market that the vacancy forecasts suggest will become more pronounced.

By 2030, CBRE expects vacancy in prime offices to have fallen by almost four percentage points, while secondary vacancy is forecast to remain relatively close to current levels.

Douglas-Perrine says the divide is already influencing what businesses are paying for the most sought-after space.