Across the nation, the office market continues to go through a period of recovery. Evidence of high vacancy rates and high incentives remain across most of the country. Most CBDs are experiencing an increase in demand, but it would appear to be slow and gradually building.
Of the capital cities, Brisbane is the standout in overall market performance for 2024, experiencing strong demand and growth. Sydney too has performed slightly better than expected with some activity returning to the market and some early signs of improvement. Melbourne and the remaining capitals however have not had the same bounce back and continue to be subdued.
Recently released data from the Property Council of Australia reveals that vacancy rates across the major CBDs continued the upward trend albeit at a slower pace than the past few years.
The total national CBD office vacancy rate in January 2025 was reported at 13.7 per cent, up slightly from 13.6 per cent in July 2024. This is a significant increase on the pre-pandemic vacancy rate which was reported by the Property Council of Australia in January 2020 at eight per cent.
Around the country, in the six months to January 2025, Sydney saw an increase in vacancy from 11.6 to 12.8 per cent, Melbourne remained steady at 18 per cent and Brisbane reported an increase from 9.5 to 10.2 per cent. Hobart also reported an increase while Darwin, Adelaide and Perth all reported decreases.
The preference for premium and A-grade office continues with most agents reporting stronger demand for this space. This is also evidenced by the lower prime vacancy rates compared to the secondary market.
Looking ahead, we expect to see rental rates remain flat. Incentives remain high across the country with some locations reporting incentives of over 40 per cent. Conditions are showing signs of easing, and we anticipate a reduction in incentives over the next year. This is especially likely in markets such as Brisbane where demand is stronger and supply is constrained.
Given the overall leasing market conditions, general market conditions and the high incentives being reported, we do not expect any substantial growth in rents this year.
In 2024 we again predicted the office market to remain generally volatile and uncertain. The major office markets continue to face downward pressure on values. Interest rates and waning investor demand on the back of high vacancy rates and negative market sentiment have led to a further softening in yields.
Based on this and the overall market conditions, we expect higher yields in 2025, particularly in Melbourne with the other capitals also softening or at best remaining steady. Investors remain cautious, with a low appetite for risk and a requirement for higher returns.
The challenges in the office market are likely to continue for some time, particularly as we navigate the generally weaker economic conditions and supply and demand factors of this segment. The recent interest rate cut is not likely to have an immediate impact on this market and will take time to have any positive effect.
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