Sydney’s vacancy rate improved over the past year, falling from a 28-year high of 12.6% in 2023 to 11.6%, while Brisbane’s rate dropped from 11.7% in Q4 2023 to 8.5%, largely due to limited new supply and stock withdrawals. In contrast, Melbourne’s vacancy rate surged to 19.6% in Q3 2024 - the highest since 1995 - driven by weakened demand and an influx of new stock.
However, reported vacancy rates may not fully reflect market realities, as they exclude:
With average lease terms at 4.3 years, many tenants remain tied to pre-COVID footprints. Office occupancy also shifted this year as companies downsized to align with hybrid trends and stricter attendance mandates. A softer job market has given employers more leverage, prompting major organisations like the NSW Government, Amazon, and Commonwealth Bank to enforce attendance policies.
Incentives have increased across Sydney, Melbourne, and Brisbane CBDs this year to offset rising face rents. Here are the current incentive ranges:
While vacancy rates have tightened in most CBDs, leasing demand has softened compared to 2023. Face rents have continued to rise, particularly for Premium and A-Grade spaces, driven by demand for high-quality offices. B-Grade rents have seen slight increases to maintain valuations, but in Melbourne and Brisbane, incentives for B-Grade buildings have grown faster than face rents, reducing effective rents.
In a speculative fit-out market, incentives can be misleading. Landlords often report full construction costs as incentives, even when building at scale significantly lowers their actual spending. For example, a fit-out costing $1,100/sqm might be reported at $1,800/sqm - the tenant’s cost. Additionally, long-vacant spec fit-outs may offer further incentives, and re-leased fit-outs are often claimed again as full-value incentives.
Despite falling, vacancy rates remain well above pre-COVID levels (except in Melbourne, where rates may not have peaked). Consequently, elevated incentives are likely to persist longer than expected. So, understanding who offers genuine deals versus playing the numbers game is critical - don’t believe everything you read.
Sublease vacancy rates have decreased in key markets this year. In Sydney, sublease vacancy is 1.6% (81,049 sqm), with 92% concentrated in the city core, and 35% from the Banking and Finance sector. While overall sublease vacancy has dropped, some areas saw declines due to more affordable direct lease options.
Melbourne's sublease availability is reported at 100,862 sqm (circa 1.9% of total stock), dropping significantly in 2024 due to leasing activity and reclassification to direct leases.
Brisbane has the lowest sublease availability at 0.6%, driven by strong leasing activity and limited exposure to financial and tech sectors. However, at Tenant CS we believe that 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.
As we head into 2025, the commercial office markets in Sydney, Melbourne, and Brisbane continue to evolve, shaped by shifting workplace trends, fluctuating demand, and persistent economic uncertainty. Here’s what to expect in the year ahead...
New commercial developments in Sydney, Brisbane, and Melbourne face significant headwinds, driven by high vacancy rates, low pre-commitment levels, and escalating construction costs. In Melbourne, construction has notably slowed, with nearly $1 billion worth of office projects either shelved or mooted, including a 24,000 sqm A-Grade office building in the CBD. This trend reflects a growing number of permit-approved projects that have been deemed unfeasible due to escalating costs, project delays, and tepid demand.
Several high-profile Melbourne developments, such as 85 Spring St and 600 Collins St, have had their completion timelines extended, further illustrating these challenges. Pre-commitments for projects expected from 2026 onwards remain critically low, undermining the "build it, and they will come" approach.
In Brisbane, construction is also constrained by labour shortages and increased construction costs. The Queensland government’s $89 billion capital program, which includes preparations for the 2032 Olympics, is expected to place additional strain on the state’s construction resources, adding further delays. While infrastructure investments may boost long-term economic activity, the immediate pressure on materials and labour could exacerbate challenges.
The push for employees to return to the office in Sydney, Brisbane, and Melbourne is gaining momentum, driven by a combination of business priorities and the increasing bargaining power of employers in the current job market. A recent survey revealed that 87% of Australian companies now mandate office attendance, with four days a week being the most common policy. Employers cite key benefits such as improved productivity, enhanced team management, and the need to maintain office space utilisation as reasons for these mandates. Additionally, employers argue that in-person work supports corporate culture and the career progression of junior employees.
With the current labour tilted in favour of employers, many organisations are leveraging their increased bargaining power to impose these requirements. This shift in power dynamics allows employers to enforce stricter mandates without facing the same level of resistance that might have been expected during the peak of remote work flexibility.
As we approach 2025, many tenants are entering their second post-COVID lease term. With in-office requirements more certain, "stay" options are likely to become more attractive once again. Its important for tenants to understand their options to stay in the same space – with lease renewals bringing the best outcomes.
Exercising options rather than renewing a lease could result in the loss of competitive tension, potentially leading to less favourable terms. Renewals often include market rent reviews and ratchet clauses that prevent rents from decreasing, meaning tenants who exercise their options may forfeit negotiation leverage and miss out on a better deal.
However, when renewing – landlords must approach renewal agreements with the same level of negotiation as they would for new tenants for “stay” tenants to benefit from a renewal deal.
Office values continued to decline in 2024, dropping 21% from their 2022 peak due to reduced 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, a 17% discount from peak value. In Melbourne, office values have fallen 27% since 2022, with limited transactions, while Sydney and Brisbane have seen more activity.
High vacancy rates have led to revenue declines, with Dexus marking down its portfolio by 11% in H1 2024. As a result, landlords face broad revenue declines, and weak tenant demand, increasing supply, and rising lease incentives are likely to pressure performance and limit value growth.
Premium-grade buildings in core CBDs, however, are holding value, and landlords like Mirvac are focusing on higher-performing assets. So, B and C-Grade assets are most vulnerable to valuation declines.
It's likely that the decline in valuations has not yet bottomed out, with further decreases expected in 2025. While the push for office mandates and anticipated declines in inflation rates could provide some support, the downward trend cannot persist indefinitely. However, it is expected to continue over the coming months. A substantial recovery in valuations will require a decrease in offshore inflation rates and the return of well-capitalised buyers. If demand for office properties in Australian capital cities increases and interest rates stabilise as projected, we may see some improvement in valuations. However, for the most part, 2025 is expected to mirror the trends of 2024.
The discourse around sustainability in commercial property is longstanding, with a noticeable increase in demand for higher-quality spaces across Australia. B and C-Grade buildings are among the worst affected. This trend has led to an uptick in demolitions and residential conversions of lower-valued properties. After a spike in demolitions for Sydney Metro West stations, removals are projected to decrease to 107,000 sqm of net lettable area (NLA) by 2025.
Although we anticipate continued growth in this trend, the high cost of construction will likely slow progress. As transport-related demolitions decrease and the outlook for office redevelopment remains subdued, the transition towards residential, accommodation, and education use will shape the outlook.
With the ongoing uncertainty, landlords have increasingly turned to coworking spaces to fill vacancies. The introduction of coworking allows a landlord to pivot attractiveness to SMBs, rather than larger format companies, and adds amenities for other tenants in the building. But just because a space is leased to a coworking provider, doesn’t mean it has clients to fill the desks.
To address this, we've seen the emergence of coworking management agreements, which allow landlords to ‘lease’ spaces ranging from 1,500 to 3,000 sqm through profit-sharing arrangements and significantly improve their occupancy rates.
Navigating the commercial real estate market can be challenging, but it doesn't have to be done alone.
At Tenant CS, we’re dedicated to helping commercial tenants secure the right space on terms that work in your favour - while saving you time and money. Our team brings the expertise and strategies you need to level the playing field and make confident decisions.
Don't leave money on the table in 2025. Book your discovery call today!
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