Businesses go for premium space with new completions lifting non‑prime vacancy
Australia’s national office vacancy rate has climbed to 15.9% as of January, up from 15.2% six months earlier, with new completions in the largest office centres a key driver of the increase, according to the latest Office Market Report from the Property Council of Australia.
The data show vacancy has increased across both central business district (CBD) and non-CBD locations, with non-CBD markets recording the sharper rise, from 17.3% to 18.5%, compared with CBD vacancy moving from 14.3% to 14.8%.
The figures underline an ongoing “flight to quality”, with demand holding up better for prime-grade assets than for secondary stock.
“Over the next five years, a lack of new supply is set to underpin a recovery in office,” said Mike Zorbas (pictured right), chief executive of the Property Council of Australia. “What we’re seeing nationally is a supply-led increase in vacancy from projects that started three years ago and are largely pre-committed.
“The end phase of this cycle’s new completions has lifted vacancy across our major markets, while the appetite for high-quality office space continues to improve. This is now the fourth consecutive six-month period of positive demand based on the recovery of interest in prime office space.”
New supply contributed 1.2 percentage points of the CBD vacancy increase and 1.6 percentage points in non-CBD markets over the six months, outweighing the impact of withdrawals and tenant demand.
“Demand for CBD office space is continuing its recovery from negative demand levels seen in mid-2023, while demand in non-CBD markets also increased but remained in negative territory for a second consecutive period,” Zorbas said.
The report indicates that tenants are increasingly concentrating in premium and A-grade buildings, particularly in Sydney, while older or lower-grade assets face weaker enquiry and take-up. This divergence has implications for refinancing, valuation outcomes and risk appetite, especially where secondary assets require capital expenditure to remain competitive.
“Tenant take-up was closely tied to where new supply is delivered and increasingly concentrated in prime-grade buildings,” Zorbas said. “New completions are attracting tenants, and the data shows that where high-quality space comes online, we consistently see stronger leasing follow.
“The flight to quality persists – in the Sydney CBD, demand was concentrated entirely in premium and A grade space, with all secondary grades recording negative demand. Tenants are making deliberate choices - they’re backing quality, location and performance and this is where we’re seeing demand show up first.”
Most CBDs remain below the national vacancy average of 15.9%. Hobart has the lowest vacancy at 5.2%, followed by Canberra at 10.2%. Perth and Melbourne are the only CBD markets sitting above the national rate, while Perth and Canberra were the only CBDs to record a decline in vacancy over the period.
Sublease vacancy has continued to trend down in both CBD and non-CBD markets, extending a pattern seen over the past two to three years. Melbourne is the only CBD with sublease vacancy above its long‑term average; all other CBD centres are now below their historical benchmarks.
Looking ahead, gross office supply over the next three years is projected to stay well under long-run norms, extending a moderation in completions evident since mid‑2022. Current forecasts point to CBD completions averaging between 100,000 and 120,000 square metres every six months, roughly half the historic average of about 240,000 square metres over the same period.
Pre‑commitment levels on upcoming projects are described as strong, particularly in Sydney, where 61% of future stock is already committed, and in Canberra, at 57%. More than one third of the known future pipeline in Melbourne and Brisbane is also pre‑let, indicating that much of the space due to be delivered has already secured anchor tenants.
“With supply moderating and a high level of pre-commitment in the pipeline, the medium-term outlook is more balanced than the headline vacancy rate alone would suggest,” Zorbas said.
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