With global and domestic economic pressures weighing on many investor and occupier decisions, Australia is expected to gather momentum over the course of 2025. Urban Property Australia explores the latest indicators and discusses what may be next for Melbourne’s property markets during these complex times.

Economic Outlook

Even though tariff rates have come down since the escalation witnessed in April, most notably between China and the United States, uncertainty remains elevated. This sharp rise in uncertainty has negatively impacted business and consumer confidence and has held back trade and investment. In this challenging and uncertain environment, economic growth projections have been downgraded in recent months. Global economic growth forecasts have been revised to a modest 2.9% in 2025 and in 2026. Although there have not been signs of a material deterioration in leading indicators, the pick-up in the Australian economy is expected to occur more gradually than previously forecast due to softer global demand and weaker consumption momentum.

Residential Market

Melbourne’s median residential house price increased for a second consecutive quarter, for the first time since 2021, however remains significantly below their peak levels with current median house prices 18% lower than the highs of late 2021. The vacancy rate for Melbourne residential property increased to 2.5% compared to its rate of 2.2% a year earlier but remains below the 10-year average of 2.9%. Reflecting the low vacancy environment, metropolitan residential rents sit just short of the all-time highs achieved earlier this year with rental levels in the Regional markets for both houses and units sitting at all-time highs as at June 2025.

Residential Apartment Market

Transactional activity in the Inner-City residential apartment market in 2025 has been surprisingly strong to date with more than 3,000 sales recorded over the first half of 2025, on track to be the most active year in the past 10 years. Most transactions were focused on Southbank and CBD-Core located apartments which collectively accounted for 55% of all Inner Melbourne apartment sales. While values of Inner-City apartments continue to recover from their trough, values remain lower than they were 12 months earlier.

Office Market

Transactional activity in Melbourne’s office market rebounded in the second quarter of 2025 with double the levels recorded in the first quarter of 2025 underpinned by activity in the CBD. While investment activity has picked up, current transactional levels remain at 20% of average levels with typically more than $3 billion transacting over an annual period. Investor confidence is gradually returning as yields stabilise and sellers adjust pricing expectations with value-add and repositioning strategies becoming more attractive, especially for assets with potential residential conversion. Office yields appear to be nearing their peaks however the spread between secondary assets is likely to continue to widen with investor demand muted for secondary offices given the soft tenant demand.

Industrial Market

After a solid start to 2025, leasing activity in the Melbourne industrial market softened in the second quarter of 2025. Leasing activity continues to be underpinned by logistics and retail trade occupiers who accounted for 64% of take up in 2025 to date. Despite broader economic headwinds, the fundamentals supporting tenant demand remain intact underpinned by population growth and e-commerce trends. Investment activity in the Melbourne industrial market picked up in the second quarter of 2025, with more than $700 million now transacted this year.

Retail market

Despite global uncertainties, retail sales remain relatively resilient, boosted by solid population growth, stable employment and moderating inflation. Over the year to June 2025, retail trade increased by 4.1% in Victoria, significantly higher than the 1.7% growth recorded in June 2024. Retailer demand has been particularly strong in sectors with essential goods, such as supermarket-anchored neighbourhood centres. Limited new supply is intensifying leasing competition, particularly in prime locations. Both domestic and offshore purchasers are actively pursuing well-located, income-secure assets, with more than $500 million transacted in the Melbourne retail property market over the first half of 2025.

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