Melbourne’s CBD office market is showing strong signs of recovery, with a looming shortage of new supply set to tilt the balance of power back towards landlords.
Knight Frank’s latest Melbourne CBD Office State of the Market report recorded 83 tenant representation briefs in the June quarter, up from 81 in March - the strongest start to a year since 2022.
At the same time, the development pipeline continues to shrink, with no new projects anticipated beyond three developments due for completion by the end of 2026.
“Market fundamentals are expected to strengthen over time, moving in favour of the landlord from the tenant,” Knight Frank Partner and Head of Research & Consulting, Victoria, Dr Tony McGough, said.
Flight to quality drives leasing rebound
Prime office rents climbed to an average of $773 per square metre during the June quarter, up 5.2 per cent over the past year and 0.8 per cent over the quarter.
Dr McGough said the flight-to-quality trend continued to dominate Melbourne’s CBD leasing market.
“Occupier activity continues to be strongest in premium and high-quality A-grade assets, particularly those offering strong amenity, modern accommodation and highly accessible locations,” he said.
The Eastern Core remains Melbourne’s standout office precinct, reflected in face rental growth of approximately 9 per cent over the past year.
“This precinct’s popularity is also evident in its comparatively lower incentive levels, which average around 40 per cent compared with the broader CBD market average of 48 per cent,” he said.
Wait-and-see mood masks strong fundamentals
While occupier demand continues to improve, investment activity remains subdued.
Only $286 million in Melbourne CBD office transactions has been recorded year-to-date, while prime yields softened by a further 13 basis points during the June quarter to average 7.02 per cent - their highest level since 2013.
Dr McGough said economic uncertainty continued to weigh on investor confidence.
“Capital markets have seen volatility in the pricing of government bonds and debt given the global uncertainty about both inflation and growth,” he said.
“In Victoria, some investors are adopting a wait-and-see approach ahead of the Victorian state election in the second half of 2026, with the potential for policy or tax reform should there be a change in government that may make investing in the state more attractive.”
However, Dr McGough said Melbourne remained well placed for long-term investment.
“The state remains a strong prospect for medium- to long-term growth from an investment point of view, standing out for its strong population growth, liveability, diversified economy, infrastructure investment and relative affordability,” he said.
“We now have the greatest spread between Sydney and Melbourne prime office yields on record.”
