Workers are turning up at the office more than required just as a prolonged squeeze on the construction of new office buildings in Australia’s two biggest cities makes towers more attractive to tenants, a shift that will benefit office landlords.
A sharp increase in construction costs, materials and labour, combined with rising interest rates pushing up the cost of debt, are making it uneconomic for developers to build towers, and future projects in both cities thin on the ground.
The squeeze is tightest in Melbourne where the CBD’s high vacancy rate – at last count 19 per cent – is also causing uncertainty and slowing landlords’ ability to get rent increases, according to commercial agency Knight Frank.
The agency’s research compares economic rents – the amount of funds needed to cover construction costs and offer a profit to a new building’s owner – with forecast rental growth. In Melbourne, economic rents are 42 per cent above what’s forecast for actual rents.
“The impact this is going to have on the Melbourne CBD is stark. We are expecting to see a prolonged squeeze on new supply going well into the early 2030’s,” according to the Knight Frank report Melbourne CBD – economic rent to moderate supply.
“New supply is going to fall to below 1 per cent of actual stock and remain there well into the 2030s. This compares to the average increase in stock of 3 per cent over the previous 20 years,” it said.
The situation is less pronounced, although similar, in Sydney where economic rent growth for city towers has far outpaced premium office rental growth.
“With economic rents well above forecast levels, the development pipeline has thinned, as many wait on the sidelines for conditions to improve,” a similar analysis for Sydney said. “The current level of supply additions over the next three years as a percentage of total stock is at its lowest level on record (1.6 per cent) and is forecast to trend towards zero if no schemes progress for 2028 and 2029.”
At the same time, analysis by Bloomberg Intelligence shows more than 80 per cent of workers in Sydney and Melbourne are in the office at least three days a week.
Bloomberg’s survey shows opportunities to collaborate, and amenities like gyms and cafes are attracting workers. “Office settings, networking opportunities and amenities are driving attendance, while commuting and work-life balance concerns remain key deterrents,” Bloomberg analyst Ken Foong wrote. “More respondents in Melbourne – where there has been more leeway on return to office – prioritise flexible work than in Sydney.”
Occupancy in both cities is slowly ticking up, although Melbourne lags considerably. In the last quarter of 2025, Sydney’s occupancy rose to 79 per cent, up from 76 per cent the previous corresponding period. Melbourne’s was 63 per cent, up from 62 per cent the previous period, according to figures from commercial agency CBRE.
The lack of shiny new towers in both capitals will advantage existing landlords.
An imbalance will drive up leasing in premium grade buildings, tenants will be more likely to renew leases – that gives landlords more bargaining power – and rents will grow 6.6 per cent a year in Sydney to 2030, well above the 10-year average, Knight Frank forecasts.
“It’s going to get tighter and tighter,” the agency’s Victorian head of research, Tony McGough, said. “We’re expecting vacancy rates to come down quite sharply in Melbourne.”
The upbeat outlook is already being reflected by property giants like GPT Group and Dexus. GPT Group’s head of office, Matthew Brown, told investors recently the “Australian office market is now clearly in early recovery”.
Commenting on GPT’s annual results, he said its office portfolio had income growth of 8.3 per cent, the strongest result in a decade, and had “secured approximately 136,000 square metres of new leasing, including heads of agreement across 137 transactions”.
“Larger tenants are now coming to market to either take more space or renew space,” he said.
Dexus chief executive Ross Du Vernet said vacancy has peaked in Sydney, Brisbane and Perth. “Vacancy is expected to peak in Melbourne shortly [in the] next 12 months. That should flow through to market incentives,” he said.
Du Vernet also brushed off concerns that job cuts related to artificial intelligence technology would hurt office leasing, saying premium office demand remained strong.
CBRE’s head of office leasing in Melbourne, Ashley Buller, said a “massive wave of deals” were being signed as tenants tried to lock in deals. Sublease space in the CBD has dissipated and there were few spots available in the top levels of premium buildings, he said.
“The first quarter of this year is going to look amazing compared to the year before. I’m not saying tenants are expanding, but they are moving to take advantage of the market.”
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Simon Johanson is a business journalist at The Age and The Sydney Morning Herald.Connect via X or email.
