Melbourne’s CBD office market shows signs of recovery with the first fall in vacancy rates in five years, positive net absorption for the first time in three years, and a slight drop in incentives. The CBD was the only East Coast capital to record a decline in vacancy, coupled with positive net absorption in H1 2025, indicating a promising market trend.
Key data and trends:
- Net Absorption: Melbourne’s CBD recorded net absorption of +1,446 sqm in H1 2025, the first positive figure in three years, with grade B space driving demand. Secondary office space outperformed prime, recording +11,379 sqm vs. -9,933 sqm for prime.
- Vacancy Rates: The CBD’s vacancy rate fell marginally to 17.9% from 18.0% in H1 2025, the first decline since H2 2019. Eastern Core Prime Rental Growth saw the highest absorption at +9,865 sqm.
- Supply Forecast: Net supply in 2026 is forecast at 116,000 sqm below the 10-year average, primarily driven by two premium developments under construction.
- Rental Growth: Prime net face rents in the Eastern Core increased 6.9% over the last year, while secondary yields softened 21 bps to 7.67%.
- Incentives: Prime incentives fell 0.1%, the first decline in over two years, with improvements concentrated in select buildings in the Eastern Core.
- Investment Activity: Two institutional office transactions in June 2025 brought the YTD total to $670m, involving private investors and offshore capital.
Precinct Performance:
- Eastern Core: Highest absorption and lowest vacancy at 12.3%, with prime rents averaging $972/sqm.
- Docklands: Vacancy rose 1.0% to 20.9%, facing locational challenges, though Southbank outperformed with lower incentives and higher rental growth.
- Civic: Weakest results with net absorption of -6,816 sqm.
Outlook:
- High incentives, rising construction costs, and limited new supply post-2027 challenge project feasibility.
- Investment appetite expected to improve with Australia’s slowly loosening monetary policy, positioning Melbourne for counter-cyclical buying.
- Yield spread between prime and secondary remains wide at 97 bps, reflecting divergent performance across precincts and asset quality.
