Our latest commercial real estate update provides a snapshot of the Australian CBD office leasing markets. We base our insights on the latest market data and our experience on the ground.
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The overall vacancy rate in Sydney CBD has eased to 11.6%, down from the 28-year high of 12.2%. This is due to limited injections in H1 and stock withdrawals, which have allowed vacancy rates to recover slightly, even with subdued demand. However, while there has been improvement, we believe the true vacancy rate is still higher due to subleasing opportunities, upcoming backfill spaces, and shadow vacancies.
The biggest Q-o-Q change in vacancy rates was seen in Premium buildings, which decreased 2.2 points from 13% to 10.8% supporting the movement towards quality spaces. A-Grade vacancy has increased steadily from last quarter from 12.2 % to 12.7%, which can be partially linked to the completion of 333 Kent St (approx. 14,000 sqm). B-Grade vacancy, has slightly decreased by 0.2 points this quarter, which is due to 48,310 sqm of stock withdrawals in the last 6 months.
As noted in our previous snapshot, office supply was limited in H1 2024 holding vacancy rates steady. However, they are expected to rise again alongside approximately 187,000 sqm coming online later this year, including:
Over the next 3-4 years, Sydney CBD will see double the amount of stock come online (a total of 407,000 sqm by 2027) compared to the 210,000 sqm that was added over the past 4-5 years. Though more than 50% of the space in these new developments is already pre-committed, movements from major tenants will increase the amount of backfill space available, further adding to vacancy pressure. Vacancy will also continue to be tested post-2027 with over 1,000,000 sqm in the pipeline.
Gross face rents have risen this quarter, with Premium rents increasing slightly from $1,700 to $1,702, A-Grade from $1,470 to $1,493, and B-Grade from $1,165 to $1,179. Inflation has driven the modest gains in Premium and B-Grade rents. In contrast, the more pronounced rise in A-Grade rents reflects a 1% increase in incentives across this grade.
This quarter, the average gross incentive rose from 36% to 37%, which contributed to a 0.4% decline in gross effective rents overall. B-Grade buildings experienced the largest drop, with gross effective rents down 3.7% from last year.
However, Tenant CS Manager, Hannah Feltham, reminds us that “tenants should be aware that these figures are just averages, and the actual incentives achievable during lease negotiations can vary significantly depending on factors such as property grade, location, asset amenities, and the landlord. For example, in the City Core Precinct, the average incentive did not increase; in fact, some landlords have taken advantage of the lowering vacancy rates and lowered incentives.”
The sublease vacancy rate currently stands at 1.6% of total vacancy, rising over the last quarter by 961 sqm to reach 81,049 sqm.
The Banking and Finance sector currently accounts for 35% of the total sublease available, with major contributors including:
The city core comprises approximately 92% of sublease space. Other precincts have seen a decline, which is likely due to more attractive direct lease options, with lower face rents and higher incentives making these areas more affordable and reducing the need for businesses to vacate or downsize.
Overall, 2024 has seen a decrease in Sydney’s sublease vacancy, which can be attributed to a stronger return-to-office, several large sublease blocks being leased, and the conversion of sublease spaces into new direct leases.
Demand over the quarter has been primarily driven by the Professional Services sector (41.4%) and Financial services (24%), which is expected to increase as office mandates rise in NSW. Activity is predominantly concentrated in the city core, which has accounted for 60% of this year’s lease transactions.
Some of the recent notable commitments shaping the Sydney CBD market include:
Hannah Feltham notes an uptick in lease renewals among tenants who previously secured space with spec fit-outs. “We have seen a drive in renewals of tenants that initially took space with a spec fit out, provided the space still meets their needs,” Hannah explained.
“By opting to renew their leases, these tenants can fully utilise their incentives as rental abatements resulting in a circa 35% reduction in their current passing rents. This approach offers greater affordability and flexibility, allowing tenants to manage costs more effectively without the immediate expenditure associated with spec fit-outs.”
Sydney’s legal district is shifting its focus away from the traditional court precinct as leading law firms relocate to the newly revamped AMP Building at 33 Alfred Street in Circular Quay. This emerging hub will prominently feature Allens, occupying the top nine floors, alongside other major players such as Lander & Rogers, Maddocks, and Pinsent Masons.
The movement reflects a broader trend of law firms seeking to upgrade their office spaces to boost their corporate image, attract top talent, and encourage a return to in-office work. The relocation of firms like Johnson Winter Slattery and Corrs to the Quay Quarter Tower, and Gadens to Chifley Square, highlights a clear preference for premium, strategically located offices that offer both prestige and enhanced amenities.
Since 2020, 19 out of the 25 largest tenants in the Sydney CBD have significantly reduced their office footprint, reflecting a broader trend of companies rethinking their real estate needs. This contraction amounts to approximately 191,600 sqm, which represents about 43% of the total increase in vacant space since Q1 2020.
Notable reductions include:
However, according to the Property Council of Australia’s biannual office market report, approximately 65,000 sqm of Premium and A-grade office space were leased in the country's top office towers, while net demand for B-grade spaces decreased by more than 40,000 sqm. This indicates that although top tenants have reduced their footprint, demand for quality still prevails and smaller tenants are backfilling these spaces.
Out of the 575 companies that moved offices over the past three years, 38% upgraded to a higher-quality space, with an average floor size increase of 11%, most of which was concentrated in the sub 200-250 sqm range.
Tenant demand remains lower than pre-pandemic levels, with the latest PCA figures showing an absorption of -64,628 sqm in the first half of 2024. The situation has deteriorated further this quarter, with an additional decline of -4,572 sqm, bringing total negative absorption to -69,200 sqm in Q3.
However, whilst high vacancy rates are impacting the CBD, certain sub-markets have been hit harder than others, with the Western Corridor, Southern, and Midtown areas reported at 16.3%, 15.6%, and 14.9% respectively. In contrast, Prime vacancy rates in the Core remain notably lower at 8.8%.
Sustainability has become a central focus for office occupiers, especially in recent years. With growing emphasis on sustainability, tenants are gravitating towards higher grade assets that boast strong Green Star, NABERS and/or WELL certifications. Studies have found 92% of corporate tenants are more likely to stay in a property with strong green credentials. Beyond ethical considerations, these buildings offer tangible benefits, such as reduced operational costs, the attraction of like-minded businesses, and the allure or retention of employees who prioritise sustainability.
However, Hannah Feltham notes that, despite the appeal of green buildings, price remains a decisive factor. “Tenants may initially seek buildings with high NABERS ratings but could ultimately choose lower-rated buildings where the rental costs are more favourable. While a high NABERS rating can add value and attract interest, the final decision often comes down to the overall affordability for tenants and decision makers,” stated Hannah.
With high demand for Premium-Grade buildings and several upcoming lease expiries, some tenants in premium buildings may face challenges finding suitable relocation options within the city core.
The completion of the Metro Martin Place towers (North and South) will bring more premium stock online. However, both towers already have strong pre-commitment levels of 100% and 94%, respectively, further highlighting the robust demand for premium spaces in prime locations.
That said, premium vacancy rates are higher outside of the core, meaning more options for those looking to relocate.
Since our last update, office values have continued their decline, down 21% from their peak in mid-2022. This comes off the back of subdued tenant demand, the shift to flexible working, and rising interest rates.
In March, Mirvac sold its 50% stake in 255 George Street for $364 million, representing a 17% discount from the asset's peak value. This transaction, the first significant office deal of 2024, was anticipated to set a benchmark for future premium office transactions.
The depreciation in office values has impacted many landlords, including Dexus, which reported a $1.5 billion loss this year. In response, Dexus and other major landlords have been actively reshaping their portfolios by selling older office buildings to reduce exposure to their declining values, highlighting the severity of the market downturn.
Nonetheless, face rents continue to increase, artificially propping up property values. However, increased supply infiltrating the market in the coming years, coupled with weak tenant demand is likely to keep the pressure on portfolio performance, driving up lease incentives and constraining value growth.
Hannah Feltham outlines that “a tangible fall in valuations and transaction prices could cause landlords to reconsider face rents, potentially triggering a long-anticipated reset. Although, we cannot see this knock-on effect happening until valuations of commercial properties continue to fall across the board. Coupled with the flight to quality, we expect B and C-grade assets will be the most impacted.”
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Melbourne CBD continues to record increases in vacancy rates, this time rising from 18% to 19.6%, the highest level since 1995. This ongoing climb is primarily driven by subdued tenant demand coupled with a substantial influx of new stock with significant contributions coming from the following buildings:
However, Tenant CS Director Matthew Pollak notes, these official vacancy figures might not tell the whole story. "In Melbourne, the agencies keep the data close to their chest, so even the institutional landlords are beholden to them. While they report vacancy rates at ~19%, when you add in spaces that are available for sublease but in use, companies with excess space that they are keen to hand back, and spaces removed from the market 'for construction,' the total space available to lease is more like 27% of the market—that’s over 1,000,000sqm in Melbourne CBD alone."
Looking ahead, new stock injections in Melbourne's CBD are expected to be limited until 2026, when around 215,000 sqm of new supply will become available. However, this pipeline may change with circa 330,000 sqm of projects in planning stages with no set completion date.
Future supply continues to face pressure from rising construction costs, leading to delays in project timelines. This impact was evident over the last quarter, with the final anticipated addition for the year, 85 Spring St (approximately 10,000 sqm), rescheduled for completion in early 2025.
The rising vacancy rate has led to a significant increase in the reported net incentives across all building grades year-on-year. Premium and A-Grade incentives have risen from 41.5% to 46.4% in the last 12 months, while B Grade buildings have also seen an uptick, reaching from 42% to 48%.
This growth in incentives for Premium and A Grade space is due to:
Although it may seem counterintuitive, quarter-on-quarter face rents continue to rise. To drive Melbourne CBD's net effective rents downward and prevent landlords from facing asset valuation declines, even higher incentives will be needed.
However, the incentives being reported can be misleading Matthew Pollak notes. “Like vacancy, a similar reporting disparity lies within incentives at 40%+. This is reported as the norm, but I challenge any company to try to get a 40%+ incentive themselves” states Pollak. “You have to know where to find that deal. Landlords and agents play games with the market here too, inflating the potential incentive but then pre-spending it on a fit-out, even if that money was actually spent for the last tenant!"
Melbourne incentives are reported as a percentage of the Net Rent, while the rest of Australia bases on the Gross Rent (including outgoings). Basing the incentive on the Net Rent inflates the figure and makes it seem like savings are higher than they are. Matthew highlights “Agencies serve a valuable purpose, but it’s not ever in favour of the tenant, especially in Melbourne.”
The latest reports indicate that sublease availability is sitting at 1.6% of total stock (circa 100,862 sqm), dropping 44,638 sqm from Q2. This is due to leasing activity, reclassification to direct leases and withdrawals by occupiers. Much of this availability is concentrated within four buildings and driven largely by two major listings totalling 57,000 sqm.
However, Pollak states “we know this reported figure underestimates the total amount of space that tenants are desperate to rid from their portfolios, whether that’s as a sublease or as a downsize when their current lease expires. Remember, if the average lease term is 5 years, in 2024, circa 40% of tenants will still be on pre-COVID leases, desperate to right-size and/or pay less rent.”
Some of the commitments which shaped the first half of the year within the Melbourne CBD market include:
These relocations will leave a large amount of backfill space, further contributing to vacancy pressure. It will be interesting to observe how long it takes for those vacancies to reach their projected numbers—or if landlords instead withdraw them from the market under the pretext of construction.
Australian economic growth (GDP) has remained positive this quarter with the eleventh consecutive rise by 0.2%. However, growth per capita has decreased. Victoria saw unemployment rise further than the national average and highest in the nation at 4.5%.
When unemployment rates rise, employees lose their bargaining power due to the oversupply of labour in the market. This may encourage back to the office mandates to becoming enforced in Melbourne in the future with little push back from employees. Coupled with future immigration, we may see a positive impact in office occupancy rates and increased demand for space.
Leasing demand in Melbourne, as indicated by net absorption, remains negative at -15,435 sqm, meaning more office space has become vacant than has been leased. This was partially offset by positive demand for Premium grade office space and 8,100 sqm of sublease vacancy being leased this quarter.
Looking ahead, Melbourne is expected to add 238,100 sqm of new office stock to the market by 2027, which is about half the level we saw over the past four years. Additionally, the city has experienced some stock withdrawals, including:
Pre-commitment levels for new stock projected from 2026 onwards remain notably low, with some assets expected to complete without pre-commitments due to strategic marketing choices or asset positioning decisions. Much of the development funding in the market is typically secured through pre-commitment rates, so the "build it, and they will come" approach may prove ambitious in the coming years.
The following projects have already been affected:
Economists project that Melbourne’s office vacancy rates may not fully recover until as late as 2032.
A growing number of businesses are shifting towards owner-occupation, especially in Melbourne’s city fringe areas. Driven by rising rents and low interest rates, many businesses are finding it cheaper to buy rather than lease, with suburbs like Cremorne, South Yarra, and Toorak seeing increased demand.
Recent reports show Melbourne's CBD fringe rents have surged by 16% in the past year, with Cremorne experiencing an 88% increase over four years. So, with mortgage repayments becoming more cost-effective than escalating rental prices, and millennial workers favouring vibrant inner-city locations, this trend is expected to continue. Sales agents anticipate that owner-occupiers will remain the dominant buyer profile in the strata office market over the next 12 months.
Melbourne office values have declined 27% since their peak in 2022, and the market outlook remains pessimistic, with office transactions increasing in Sydney and Brisbane but not yet in Melbourne. Some activity has been noted, such as the $30 million sale of 411 Collins St and the $40 million sale of 425 Collins St, both occurring at a 20% discount from their peak values. However, overall transactions remain limited due to decreased demand from investors.
Mirvac has exchanged contracts with a purchaser for the sale of 367 Collins Street (the Optus Centre), conditional on final agreements which is forecasted to reflect a 20.7% reduction from its 2022 book value of $427 million.
Matthew Pollak states, “Like Sydney, towers maintaining their prices are premium buildings in the CBD core, simply because they don't sell – as selling would realise their losses. Many landlords have started strategically bolstering their portfolios with these higher-performing assets, including Mirvac, which has increased the number of premium-grade offices in their portfolio to 46%.”
As a result of high vacancy rates, landlord revenues are also experiencing a broad decline. For instance, in the first six months of 2024, Dexus marked down its office portfolio value by approximately 11% and its share price dropped by approximately 15%. In the last year, Mirvac Wholesale Office Fund also saw a significant 14.5% drop in total return and a 12% drop in share price. With the market’s low performance this quarter, incentive and increased vacancy to come, it may be a gradual recovery rather than a quick comeback.
Brisbane’s overall vacancy rate has dropped to 8.5% driven by limited new supply and the recent withdrawal of 40,338 sqm of office space. A-Grade buildings were the most affected, with vacancies falling to just 4.22%, as their price-to-quality value proposition continues to attract tenants over Premium Grade options. Conversely, B-Grade building vacancies have risen by 3.1% year-over-year, even with the recent removal of two buildings from the market for conversion.
Leasing activity has remained subdued over the past quarter, with the State Government shifting focus, larger corporations adopting a more cautious stance, and a general trend toward lease renewals. Yet, even with demand levels lower than in previous years, the limited supply in Brisbane continues to outpace current leasing needs, driving vacancy rates to lows not seen since 2012. If demand remains steady, vacancy rates could fall further in the coming years, with the next wave of new stock not expected until late 2025.
Gross face rents across all grades remained largely stable, with Premium, A-Grade, and B-Grade ending the period at $1,133, $860, and $722, respectively.
Incentive levels remain elevated across all grades, with Premium Grade seeing a notable increase from 35% to 37%. This rise can be attributed to the significantly higher face rents in Premium Grade assets compared to existing developments, prompting landlords to offer greater incentives to attract tenants to their buildings.
Where incentives have seen a decrease is in spaces with existing or 2nd-gen spec fit-outs, where landlords are pushing to achieve incentives of 20-25% (well below the market average). Moving forward, we expect incentives for B-grade spaces to remain elevated thanks to reduced demand for these assets.
Sublease availability in Brisbane declined by 3,902 sqm (-21.8%) over the last quarter. It remains one of the lowest in the country at circa 0.6% of total stock due to strong leasing activity and the city's limited exposure to financial and tech companies, which are the main drivers of subleasing nationwide.
Some of the recent commitments shaping the Brisbane CBD include:
The demand in Brisbane CBD this quarter is largely dominated by the Resources sector (24%) followed by Community (17%) and Financial Services (17%).
In 2023, government tenants accounted for 31% of leasing activity, with a noticeable shift from B-Grade to A-Grade assets. A key example is Boeing’s relocation from 150 Charlotte Street to 123 Albert Street, leaving a significant amount of backfill space behind.
Additionally, Services Australia has pre-committed to the entire Premium Grade building at 205 North Quay, scheduled for completion in 2025. This move will consolidate their operations from four other CBD buildings—143 Turbot St, 140 Elizabeth St, 400 George St, and 140 Creek St—resulting in a notable amount of backfill space across these locations.
With government leasing activity slowing in recent months due to the state election, smaller tenants (under 1,000 sqm) are now driving demand for office space. In 2024, demand for sub-500 sqm spaces has surged, outperforming previous years and contributing significantly to the 6,911 sqm of positive net absorption recorded over the past six months.
New stock in the Brisbane market has been limited, with a total of 75,100 sqm added since 2022. This includes the completion of 80 Ann Street (62,100 sqm) in 2022 and, more recently, the refurbishment of the Christie Centre at 320 Adelaide Street (13,000 sqm). Meanwhile, withdrawals of secondary stock continue, with buildings such as 150 Charlotte Street and 41 George Street earmarked for conversion into student accommodation.
Looking ahead to 2025, new supply remains constrained, with only two buildings set for completion:
Over the next few years, only a limited number of additional buildings are expected to come online, including:
However, several mooted projects are in the pipeline, including QIC’s 101 Albert Street (45,000sqm), ISPT’s Regent Tower at 150 Elizabeth Street (53,000 sqm) and 135 Eagle Street.
The ABS has reported a 31.1% increase in construction costs nationwide. Combined with Queensland’s ongoing trades shortage, this has hindered new developments in Brisbane, placing downward pressure on supply and further reducing vacancy rates.
The Queensland government has also announced a record $89 billion capital program over the next four years, with a portion earmarked for the development of venues and infrastructure in Brisbane for the 2032 Olympics. While this investment is promising for the city’s infrastructure, it may add further strain on local construction resources, potentially prolonging timelines for commercial developments.
In 2023, the leasing rate for speculative fit-outs was reported at just 58%, with speculative and existing fit-outs in the 200-300 sqm range underperforming across all asset grades. While there has been some improvement in 2024, B-Grade speculative fit-outs faced particular challenges last year, achieving a leasing rate of only 43%. This lower performance may prompt landlords to reevaluate the effectiveness of speculative fit-outs as a tenant attraction strategy for B-Grade assets.
In recent years, B-Grade property owners have increasingly turned to speculative fit-outs to attract tenants, yet this approach has led to oversupply and lingering vacancies. Tenant demand for these speculative spaces in B-Grade remains subdued, forcing landlords to offer higher incentives and shorter lease terms to fill vacancies. Interestingly, existing fit-outs and second-generation speculative fit-outs are gaining more interest, especially among cost-conscious tenants who are driven by strong incentives and flexible terms.
The war for talent and return-to-office are two big-ticket objectives fuelling the ongoing flight to quality in Brisbane. We’re seeing an appetite for higher-grade stock in good locations with efficient floorplates, quality fit-outs, and premium amenities.
Recently, more tenants are securing Premium and A-Grade spaces through new leases before the current leases expire or before the spaces officially come onto the market. This trend underscores the high demand for top-quality spaces, which are in limited supply and are expected to further reduce the vacancy rate.
Like other major cities, Brisbane has seen an uptick in tenants seeking buildings with green initiatives. This is further subduing demand for lower-grade assets that are poorly located or positioned. Coupled with rising construction costs and demand for refurbished fit-outs, many secondary landlords are adopting new strategies to attract tenants and reduce their outlay.
Nationwide, the education sector is undergoing significant shifts due to government initiatives that cap student numbers for service providers and restrict entry for foreign students. Decision-makers are holding off on further guidance until the Senate reaches a decision on this cap legislation. In Brisbane, these changes have dampened demand in the sector, with the only notable education-related requirement in Q3 being Omni Academies who were seeking 1,000 sqm in the city fringe.
In most Australian cities it’s a tenant’s market and will be for the foreseeable future. Landlords are competing to secure quality occupants on long leases and are more flexible than they have been in years.
Opportunistic tenants are taking advantage of favourable market conditions by renegotiating terms in their existing space or relocating to a better building.
To secure the best terms, tenants need only find the soft spots in the market and develop their strategy around landlord motivators.
But the landscape is challenging to navigate alone. Even in a favourable market, there's more to negotiate, and tenants need access to the whole market to get the best deal.
Tenant CS is an independent tenant advisory firm that exclusively represents tenants in commercial negotiations to secure favourable lease terms and savings.
Book a discovery call to find out how we can help you with your next lease negotiation or relocation project.
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Our latest commercial real estate update provides a snapshot of the Australian CBD office leasing markets. We base our insights on the latest market data and our experience on the ground.
The overall vacancy rate in Sydney CBD has eased to 11.6%, down from the 28-year high of 12.2%. This is due to limited injections in H1 and stock withdrawals, which have allowed vacancy rates to recover slightly, even with subdued demand. However, while there has been improvement, we believe the true vacancy rate is still higher due to subleasing opportunities, upcoming backfill spaces, and shadow vacancies.
The biggest Q-o-Q change in vacancy rates was seen in Premium buildings, which decreased 2.2 points from 13% to 10.8% supporting the movement towards quality spaces. A-Grade vacancy has increased steadily from last quarter from 12.2 % to 12.7%, which can be partially linked to the completion of 333 Kent St (approx. 14,000 sqm). B-Grade vacancy, has slightly decreased by 0.2 points this quarter, which is due to 48,310 sqm of stock withdrawals in the last 6 months.
As noted in our previous snapshot, office supply was limited in H1 2024 holding vacancy rates steady. However, they are expected to rise again alongside approximately 187,000 sqm coming online later this year, including:
Over the next 3-4 years, Sydney CBD will see double the amount of stock come online (a total of 407,000 sqm by 2027) compared to the 210,000 sqm that was added over the past 4-5 years. Though more than 50% of the space in these new developments is already pre-committed, movements from major tenants will increase the amount of backfill space available, further adding to vacancy pressure. Vacancy will also continue to be tested post-2027 with over 1,000,000 sqm in the pipeline.
Gross face rents have risen this quarter, with Premium rents increasing slightly from $1,700 to $1,702, A-Grade from $1,470 to $1,493, and B-Grade from $1,165 to $1,179. Inflation has driven the modest gains in Premium and B-Grade rents. In contrast, the more pronounced rise in A-Grade rents reflects a 1% increase in incentives across this grade.
This quarter, the average gross incentive rose from 36% to 37%, which contributed to a 0.4% decline in gross effective rents overall. B-Grade buildings experienced the largest drop, with gross effective rents down 3.7% from last year.
However, Tenant CS Manager, Hannah Feltham, reminds us that “tenants should be aware that these figures are just averages, and the actual incentives achievable during lease negotiations can vary significantly depending on factors such as property grade, location, asset amenities, and the landlord. For example, in the City Core Precinct, the average incentive did not increase; in fact, some landlords have taken advantage of the lowering vacancy rates and lowered incentives.”
The sublease vacancy rate currently stands at 1.6% of total vacancy, rising over the last quarter by 961 sqm to reach 81,049 sqm.
The Banking and Finance sector currently accounts for 35% of the total sublease available, with major contributors including:
The city core comprises approximately 92% of sublease space. Other precincts have seen a decline, which is likely due to more attractive direct lease options, with lower face rents and higher incentives making these areas more affordable and reducing the need for businesses to vacate or downsize.
Overall, 2024 has seen a decrease in Sydney’s sublease vacancy, which can be attributed to a stronger return-to-office, several large sublease blocks being leased, and the conversion of sublease spaces into new direct leases.
Demand over the quarter has been primarily driven by the Professional Services sector (41.4%) and Financial services (24%), which is expected to increase as office mandates rise in NSW. Activity is predominantly concentrated in the city core, which has accounted for 60% of this year’s lease transactions.
Some of the recent notable commitments shaping the Sydney CBD market include:
Hannah Feltham notes an uptick in lease renewals among tenants who previously secured space with spec fit-outs. “We have seen a drive in renewals of tenants that initially took space with a spec fit out, provided the space still meets their needs,” Hannah explained.
“By opting to renew their leases, these tenants can fully utilise their incentives as rental abatements resulting in a circa 35% reduction in their current passing rents. This approach offers greater affordability and flexibility, allowing tenants to manage costs more effectively without the immediate expenditure associated with spec fit-outs.”
Sydney’s legal district is shifting its focus away from the traditional court precinct as leading law firms relocate to the newly revamped AMP Building at 33 Alfred Street in Circular Quay. This emerging hub will prominently feature Allens, occupying the top nine floors, alongside other major players such as Lander & Rogers, Maddocks, and Pinsent Masons.
The movement reflects a broader trend of law firms seeking to upgrade their office spaces to boost their corporate image, attract top talent, and encourage a return to in-office work. The relocation of firms like Johnson Winter Slattery and Corrs to the Quay Quarter Tower, and Gadens to Chifley Square, highlights a clear preference for premium, strategically located offices that offer both prestige and enhanced amenities.
Since 2020, 19 out of the 25 largest tenants in the Sydney CBD have significantly reduced their office footprint, reflecting a broader trend of companies rethinking their real estate needs. This contraction amounts to approximately 191,600 sqm, which represents about 43% of the total increase in vacant space since Q1 2020.
Notable reductions include:
However, according to the Property Council of Australia’s biannual office market report, approximately 65,000 sqm of Premium and A-grade office space were leased in the country's top office towers, while net demand for B-grade spaces decreased by more than 40,000 sqm. This indicates that although top tenants have reduced their footprint, demand for quality still prevails and smaller tenants are backfilling these spaces.
Out of the 575 companies that moved offices over the past three years, 38% upgraded to a higher-quality space, with an average floor size increase of 11%, most of which was concentrated in the sub 200-250 sqm range.
Tenant demand remains lower than pre-pandemic levels, with the latest PCA figures showing an absorption of -64,628 sqm in the first half of 2024. The situation has deteriorated further this quarter, with an additional decline of -4,572 sqm, bringing total negative absorption to -69,200 sqm in Q3.
However, whilst high vacancy rates are impacting the CBD, certain sub-markets have been hit harder than others, with the Western Corridor, Southern, and Midtown areas reported at 16.3%, 15.6%, and 14.9% respectively. In contrast, Prime vacancy rates in the Core remain notably lower at 8.8%.
Sustainability has become a central focus for office occupiers, especially in recent years. With growing emphasis on sustainability, tenants are gravitating towards higher grade assets that boast strong Green Star, NABERS and/or WELL certifications. Studies have found 92% of corporate tenants are more likely to stay in a property with strong green credentials. Beyond ethical considerations, these buildings offer tangible benefits, such as reduced operational costs, the attraction of like-minded businesses, and the allure or retention of employees who prioritise sustainability.
However, Hannah Feltham notes that, despite the appeal of green buildings, price remains a decisive factor. “Tenants may initially seek buildings with high NABERS ratings but could ultimately choose lower-rated buildings where the rental costs are more favourable. While a high NABERS rating can add value and attract interest, the final decision often comes down to the overall affordability for tenants and decision makers,” stated Hannah.
With high demand for Premium-Grade buildings and several upcoming lease expiries, some tenants in premium buildings may face challenges finding suitable relocation options within the city core.
The completion of the Metro Martin Place towers (North and South) will bring more premium stock online. However, both towers already have strong pre-commitment levels of 100% and 94%, respectively, further highlighting the robust demand for premium spaces in prime locations.
That said, premium vacancy rates are higher outside of the core, meaning more options for those looking to relocate.
Since our last update, office values have continued their decline, down 21% from their peak in mid-2022. This comes off the back of subdued tenant demand, the shift to flexible working, and rising interest rates.
In March, Mirvac sold its 50% stake in 255 George Street for $364 million, representing a 17% discount from the asset's peak value. This transaction, the first significant office deal of 2024, was anticipated to set a benchmark for future premium office transactions.
The depreciation in office values has impacted many landlords, including Dexus, which reported a $1.5 billion loss this year. In response, Dexus and other major landlords have been actively reshaping their portfolios by selling older office buildings to reduce exposure to their declining values, highlighting the severity of the market downturn.
Nonetheless, face rents continue to increase, artificially propping up property values. However, increased supply infiltrating the market in the coming years, coupled with weak tenant demand is likely to keep the pressure on portfolio performance, driving up lease incentives and constraining value growth.
Hannah Feltham outlines that “a tangible fall in valuations and transaction prices could cause landlords to reconsider face rents, potentially triggering a long-anticipated reset. Although, we cannot see this knock-on effect happening until valuations of commercial properties continue to fall across the board. Coupled with the flight to quality, we expect B and C-grade assets will be the most impacted.”
Melbourne CBD continues to record increases in vacancy rates, this time rising from 18% to 19.6%, the highest level since 1995. This ongoing climb is primarily driven by subdued tenant demand coupled with a substantial influx of new stock with significant contributions coming from the following buildings:
However, Tenant CS Director Matthew Pollak notes, these official vacancy figures might not tell the whole story. "In Melbourne, the agencies keep the data close to their chest, so even the institutional landlords are beholden to them. While they report vacancy rates at ~19%, when you add in spaces that are available for sublease but in use, companies with excess space that they are keen to hand back, and spaces removed from the market 'for construction,' the total space available to lease is more like 27% of the market—that’s over 1,000,000sqm in Melbourne CBD alone."
Looking ahead, new stock injections in Melbourne's CBD are expected to be limited until 2026, when around 215,000 sqm of new supply will become available. However, this pipeline may change with circa 330,000 sqm of projects in planning stages with no set completion date.
Future supply continues to face pressure from rising construction costs, leading to delays in project timelines. This impact was evident over the last quarter, with the final anticipated addition for the year, 85 Spring St (approximately 10,000 sqm), rescheduled for completion in early 2025.
The rising vacancy rate has led to a significant increase in the reported net incentives across all building grades year-on-year. Premium and A-Grade incentives have risen from 41.5% to 46.4% in the last 12 months, while B Grade buildings have also seen an uptick, reaching from 42% to 48%.
This growth in incentives for Premium and A Grade space is due to:
Although it may seem counterintuitive, quarter-on-quarter face rents continue to rise. To drive Melbourne CBD's net effective rents downward and prevent landlords from facing asset valuation declines, even higher incentives will be needed.
However, the incentives being reported can be misleading Matthew Pollak notes. “Like vacancy, a similar reporting disparity lies within incentives at 40%+. This is reported as the norm, but I challenge any company to try to get a 40%+ incentive themselves” states Pollak. “You have to know where to find that deal. Landlords and agents play games with the market here too, inflating the potential incentive but then pre-spending it on a fit-out, even if that money was actually spent for the last tenant!"
Melbourne incentives are reported as a percentage of the Net Rent, while the rest of Australia bases on the Gross Rent (including outgoings). Basing the incentive on the Net Rent inflates the figure and makes it seem like savings are higher than they are. Matthew highlights “Agencies serve a valuable purpose, but it’s not ever in favour of the tenant, especially in Melbourne.”
The latest reports indicate that sublease availability is sitting at 1.6% of total stock (circa 100,862 sqm), dropping 44,638 sqm from Q2. This is due to leasing activity, reclassification to direct leases and withdrawals by occupiers. Much of this availability is concentrated within four buildings and driven largely by two major listings totalling 57,000 sqm.
However, Pollak states “we know this reported figure underestimates the total amount of space that tenants are desperate to rid from their portfolios, whether that’s as a sublease or as a downsize when their current lease expires. Remember, if the average lease term is 5 years, in 2024, circa 40% of tenants will still be on pre-COVID leases, desperate to right-size and/or pay less rent.”
Some of the commitments which shaped the first half of the year within the Melbourne CBD market include:
These relocations will leave a large amount of backfill space, further contributing to vacancy pressure. It will be interesting to observe how long it takes for those vacancies to reach their projected numbers—or if landlords instead withdraw them from the market under the pretext of construction.
Australian economic growth (GDP) has remained positive this quarter with the eleventh consecutive rise by 0.2%. However, growth per capita has decreased. Victoria saw unemployment rise further than the national average and highest in the nation at 4.5%.
When unemployment rates rise, employees lose their bargaining power due to the oversupply of labour in the market. This may encourage back to the office mandates to becoming enforced in Melbourne in the future with little push back from employees. Coupled with future immigration, we may see a positive impact in office occupancy rates and increased demand for space.
Leasing demand in Melbourne, as indicated by net absorption, remains negative at -15,435 sqm, meaning more office space has become vacant than has been leased. This was partially offset by positive demand for Premium grade office space and 8,100 sqm of sublease vacancy being leased this quarter.
Looking ahead, Melbourne is expected to add 238,100 sqm of new office stock to the market by 2027, which is about half the level we saw over the past four years. Additionally, the city has experienced some stock withdrawals, including:
Pre-commitment levels for new stock projected from 2026 onwards remain notably low, with some assets expected to complete without pre-commitments due to strategic marketing choices or asset positioning decisions. Much of the development funding in the market is typically secured through pre-commitment rates, so the "build it, and they will come" approach may prove ambitious in the coming years.
The following projects have already been affected:
Economists project that Melbourne’s office vacancy rates may not fully recover until as late as 2032.
A growing number of businesses are shifting towards owner-occupation, especially in Melbourne’s city fringe areas. Driven by rising rents and low interest rates, many businesses are finding it cheaper to buy rather than lease, with suburbs like Cremorne, South Yarra, and Toorak seeing increased demand.
Recent reports show Melbourne's CBD fringe rents have surged by 16% in the past year, with Cremorne experiencing an 88% increase over four years. So, with mortgage repayments becoming more cost-effective than escalating rental prices, and millennial workers favouring vibrant inner-city locations, this trend is expected to continue. Sales agents anticipate that owner-occupiers will remain the dominant buyer profile in the strata office market over the next 12 months.
Melbourne office values have declined 27% since their peak in 2022, and the market outlook remains pessimistic, with office transactions increasing in Sydney and Brisbane but not yet in Melbourne. Some activity has been noted, such as the $30 million sale of 411 Collins St and the $40 million sale of 425 Collins St, both occurring at a 20% discount from their peak values. However, overall transactions remain limited due to decreased demand from investors.
Mirvac has exchanged contracts with a purchaser for the sale of 367 Collins Street (the Optus Centre), conditional on final agreements which is forecasted to reflect a 20.7% reduction from its 2022 book value of $427 million.
Matthew Pollak states, “Like Sydney, towers maintaining their prices are premium buildings in the CBD core, simply because they don't sell – as selling would realise their losses. Many landlords have started strategically bolstering their portfolios with these higher-performing assets, including Mirvac, which has increased the number of premium-grade offices in their portfolio to 46%.”
As a result of high vacancy rates, landlord revenues are also experiencing a broad decline. For instance, in the first six months of 2024, Dexus marked down its office portfolio value by approximately 11% and its share price dropped by approximately 15%. In the last year, Mirvac Wholesale Office Fund also saw a significant 14.5% drop in total return and a 12% drop in share price. With the market’s low performance this quarter, incentive and increased vacancy to come, it may be a gradual recovery rather than a quick comeback.
Brisbane’s overall vacancy rate has dropped to 8.5% driven by limited new supply and the recent withdrawal of 40,338 sqm of office space. A-Grade buildings were the most affected, with vacancies falling to just 4.22%, as their price-to-quality value proposition continues to attract tenants over Premium Grade options. Conversely, B-Grade building vacancies have risen by 3.1% year-over-year, even with the recent removal of two buildings from the market for conversion.
Leasing activity has remained subdued over the past quarter, with the State Government shifting focus, larger corporations adopting a more cautious stance, and a general trend toward lease renewals. Yet, even with demand levels lower than in previous years, the limited supply in Brisbane continues to outpace current leasing needs, driving vacancy rates to lows not seen since 2012. If demand remains steady, vacancy rates could fall further in the coming years, with the next wave of new stock not expected until late 2025.
Gross face rents across all grades remained largely stable, with Premium, A-Grade, and B-Grade ending the period at $1,133, $860, and $722, respectively.
Incentive levels remain elevated across all grades, with Premium Grade seeing a notable increase from 35% to 37%. This rise can be attributed to the significantly higher face rents in Premium Grade assets compared to existing developments, prompting landlords to offer greater incentives to attract tenants to their buildings.
Where incentives have seen a decrease is in spaces with existing or 2nd-gen spec fit-outs, where landlords are pushing to achieve incentives of 20-25% (well below the market average). Moving forward, we expect incentives for B-grade spaces to remain elevated thanks to reduced demand for these assets.
Sublease availability in Brisbane declined by 3,902 sqm (-21.8%) over the last quarter. It remains one of the lowest in the country at circa 0.6% of total stock due to strong leasing activity and the city's limited exposure to financial and tech companies, which are the main drivers of subleasing nationwide.
Some of the recent commitments shaping the Brisbane CBD include:
The demand in Brisbane CBD this quarter is largely dominated by the Resources sector (24%) followed by Community (17%) and Financial Services (17%).
In 2023, government tenants accounted for 31% of leasing activity, with a noticeable shift from B-Grade to A-Grade assets. A key example is Boeing’s relocation from 150 Charlotte Street to 123 Albert Street, leaving a significant amount of backfill space behind.
Additionally, Services Australia has pre-committed to the entire Premium Grade building at 205 North Quay, scheduled for completion in 2025. This move will consolidate their operations from four other CBD buildings—143 Turbot St, 140 Elizabeth St, 400 George St, and 140 Creek St—resulting in a notable amount of backfill space across these locations.
With government leasing activity slowing in recent months due to the state election, smaller tenants (under 1,000 sqm) are now driving demand for office space. In 2024, demand for sub-500 sqm spaces has surged, outperforming previous years and contributing significantly to the 6,911 sqm of positive net absorption recorded over the past six months.
New stock in the Brisbane market has been limited, with a total of 75,100 sqm added since 2022. This includes the completion of 80 Ann Street (62,100 sqm) in 2022 and, more recently, the refurbishment of the Christie Centre at 320 Adelaide Street (13,000 sqm). Meanwhile, withdrawals of secondary stock continue, with buildings such as 150 Charlotte Street and 41 George Street earmarked for conversion into student accommodation.
Looking ahead to 2025, new supply remains constrained, with only two buildings set for completion:
Over the next few years, only a limited number of additional buildings are expected to come online, including:
However, several mooted projects are in the pipeline, including QIC’s 101 Albert Street (45,000sqm), ISPT’s Regent Tower at 150 Elizabeth Street (53,000 sqm) and 135 Eagle Street.
The ABS has reported a 31.1% increase in construction costs nationwide. Combined with Queensland’s ongoing trades shortage, this has hindered new developments in Brisbane, placing downward pressure on supply and further reducing vacancy rates.
The Queensland government has also announced a record $89 billion capital program over the next four years, with a portion earmarked for the development of venues and infrastructure in Brisbane for the 2032 Olympics. While this investment is promising for the city’s infrastructure, it may add further strain on local construction resources, potentially prolonging timelines for commercial developments.
In 2023, the leasing rate for speculative fit-outs was reported at just 58%, with speculative and existing fit-outs in the 200-300 sqm range underperforming across all asset grades. While there has been some improvement in 2024, B-Grade speculative fit-outs faced particular challenges last year, achieving a leasing rate of only 43%. This lower performance may prompt landlords to reevaluate the effectiveness of speculative fit-outs as a tenant attraction strategy for B-Grade assets.
In recent years, B-Grade property owners have increasingly turned to speculative fit-outs to attract tenants, yet this approach has led to oversupply and lingering vacancies. Tenant demand for these speculative spaces in B-Grade remains subdued, forcing landlords to offer higher incentives and shorter lease terms to fill vacancies. Interestingly, existing fit-outs and second-generation speculative fit-outs are gaining more interest, especially among cost-conscious tenants who are driven by strong incentives and flexible terms.
The war for talent and return-to-office are two big-ticket objectives fuelling the ongoing flight to quality in Brisbane. We’re seeing an appetite for higher-grade stock in good locations with efficient floorplates, quality fit-outs, and premium amenities.
Recently, more tenants are securing Premium and A-Grade spaces through new leases before the current leases expire or before the spaces officially come onto the market. This trend underscores the high demand for top-quality spaces, which are in limited supply and are expected to further reduce the vacancy rate.
Like other major cities, Brisbane has seen an uptick in tenants seeking buildings with green initiatives. This is further subduing demand for lower-grade assets that are poorly located or positioned. Coupled with rising construction costs and demand for refurbished fit-outs, many secondary landlords are adopting new strategies to attract tenants and reduce their outlay.
Nationwide, the education sector is undergoing significant shifts due to government initiatives that cap student numbers for service providers and restrict entry for foreign students. Decision-makers are holding off on further guidance until the Senate reaches a decision on this cap legislation. In Brisbane, these changes have dampened demand in the sector, with the only notable education-related requirement in Q3 being Omni Academies who were seeking 1,000 sqm in the city fringe.
In most Australian cities it’s a tenant’s market and will be for the foreseeable future. Landlords are competing to secure quality occupants on long leases and are more flexible than they have been in years.
Opportunistic tenants are taking advantage of favourable market conditions by renegotiating terms in their existing space or relocating to a better building.
To secure the best terms, tenants need only find the soft spots in the market and develop their strategy around landlord motivators.
But the landscape is challenging to navigate alone. Even in a favourable market, there's more to negotiate, and tenants need access to the whole market to get the best deal.
Tenant CS is an independent tenant advisory firm that exclusively represents tenants in commercial negotiations to secure favourable lease terms and savings.
Book a discovery call to find out how we can help you with your next lease negotiation or relocation project.
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