Record Melbourne CBD office incentives create tenant sweet spot

“We can confirm the highest incentives on record. Given supply shuts off after this year we think it is there, or there abouts, for incentives.”

Record incentives spark tenant window

The agency’s latest Melbourne CBD Office State of the Market report found average leasing incentives climbed to 48.1 per cent during the June quarter, allowing tenants to negotiate generous lease deals, including discounted rent and landlord-funded fit-outs, despite strengthening tenant demand and CBD vacancy remaining at around 19 per cent.

Tenant enquiries have climbed to their strongest level since 2022, and rents in the best buildings have continued to rise.

McGough says the current market presents a rare opportunity for tenants.

“It is sort of the sweet spot for tenants right now,” he says. “If you’re a tenant, now is really the time to be signing those leases for now and for a few years into the future because you are in a good position.”

While Melbourne CBD prime face rents have increased by 5.2 per cent over the past year and now average $ 773 per square metre, many tenants are paying substantially less than the advertised rent, also known as the face rent, because of the generous incentives on offer.

McGough says those incentives can include rent discounts, fitouts or shorter lease terms, reducing a tenant’s effective occupancy cost without lowering the advertised rent.

“In parts of the market where it’s a little bit more of an extreme hunt for tenants, you might get incentives on rent and fitout help,” he adds.

However, not all parts of the CBD are offering the same level of incentives. Landlords in Flagstaff are providing incentives averaging 55 per cent of headline rent, while Docklands averages 53.8 per cent. In contrast, the more tightly held Eastern Core – home to many of Melbourne’s premium office buildings and the Paris end of Collins Street – averages 39.7 per cent in incentives. 

It means landlords are prepared to sacrifice short-term rental income because keeping buildings occupied is ultimately more valuable than leaving floors vacant, helping maintain activity throughout the tower, including ground-floor retail.

“The most important thing is, of course, for the landlord to get the space occupied. You don’t want an empty tower,” McGough adds.

The strategy relies on securing tenants today, with landlords expecting market conditions to look very different when leases come for review in four or five years. By then, the development pipeline is expected to have dried up, incentives to have eased, and the leasing environment to have strengthened.

“You have vacant space, and you want it taken up … it’s exactly what every other industry does. You give them a discount to get people in,” he says.

Office supply cliff looms post-2026

Melbourne’s office demand is starting to improve just as the future development pipeline begins to thin dramatically.

McGough says the market is entering a period of transition.

“What we’re seeing is a growing disconnect between current market sentiment and the medium-term supply outlook,” he says.

“Tenant demand has strengthened significantly; rents continue to rise and, once the current development pipeline is completed, there is very little new stock coming behind it.”

Knight Frank recorded 83 tenant representation briefs during the June quarter, following 81 in the March quarter – the strongest start to a year in four years.

Its research also found the wave of post-pandemic office downsizing appears to be ending, with 62 per cent of occupiers now expanding or maintaining their office footprint and only 38 per cent reducing space. Net effective rents also recorded their strongest annual growth since 2019.

Recent corporate leasing commitments suggest businesses are already moving. MasterCard has taken a new three-year lease and a 950-square-metre space at Rialto Tower; Insignia Financial has signed a 10-year lease for 8400 square metres at 8 Exhibition Street; and Hostplus has pre-committed to 3600 square metres at 435 Bourke Street for a 10-year term. In addition, Court Services Victoria is renewing 10,000 square metres at 181 William Street on a seven-year lease, and software company Iress has signed a new 10-year lease at 555 Collins Street.

Simon Hale, partner and joint head of office leasing at Knight Frank, agrees that businesses were becoming increasingly active.

“We’re seeing a growing number of occupiers testing the market and taking advantage of favourable leasing conditions, particularly for high-quality space in premium and A-grade buildings,” he says.

The window may not remain open for long. After three office developments are completed this year, no new office construction in Melbourne’s CBD is currently anticipated, according to Knight Frank.

Knight Frank forecasts premium vacancy will almost halve to 8.5 per cent by 2030 as demand strengthens and supply tightens, while larger occupiers seeking contiguous space – two or more connected floors within the same building – are expected to face fewer options.

McGough said landlords’ bargaining power was likely to increase once the current pipeline had been absorbed.

“With the supply stopping after this year, basically, the incentives will start falling quite rapidly,” he says. “As more people are coming in and there’s no new space, the landlords will start realising they don’t need to offer quite so much to get the new tenants in.”

While occupier confidence is improving, the investment market remains more subdued.