• Leasing activity has picked up in the Melbourne metropolitan office market, driven by small occupiers seeking space less than 1,000 square metres, capitalising on favourable leasing terms on offer;
• 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 with total transactional activity surpassing $300 million;
• With tenant demand picking up, the Melbourne metropolitan office market vacancy rate recorded a slight decrease, falling to 14.6% in June 2025, but remains more than double the long-term average.

Office Market Summary

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.

Sales Volume / Yields

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 with total transactional activity surpassing $300 million. 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. More than half of the sales volume of Melbourne offices was for stock in the CBD and the metropolitan office market accounting for 29% of sales in 2025 to date. 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. While sales activity remains relatively constrained and investor interest similarly soft, Urban Property has recorded a marginal increase in yields for Melbourne metropolitan offices. As at June 2025, average prime metropolitan office yields have risen to 7.65% with secondary yields averaging 9.25%. Urban Property expects Melbourne office yields are 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.

Melbourne Office Investment Activity

Supply

Urban Property is currently tracking 95,000 square metres of new office projects currently under construction in the metropolitan office market with scheduled completions in 2025 forecast to total 65,000 square metres. Of all the total stock currently under construction in the metropolitan office market, only 35% is already committed. Much of the focus of the new development remains focused on the City Fringe with the precinct accounting for 82% of all new metropolitan office stock projected to be completed in the two years. Looking ahead, Urban Property forecasts that the pipeline of new supply will continue to moderate as developers increasingly favour refurbishment over new builds. This slowdown is driven by high construction costs, subdued rental growth, and economic rents that do not support feasible development. Government-led initiatives and rezoning have also accelerated stock withdrawals and conversions to residential or mixed-use projects.

Tenant Demand

Over the year to June 2025, Victoria’s total employment has increased by 84,000, above the growth of 79,000 recorded 12 months ago, however the state’s unemployment rate rose to 4.6% as at June 2025, up from 4.5% as at June 2024. A similar trend was observed in the job market with 46,300 jobs advertised in Victoria as at June 2025, down from 53,200 a year earlier, with current levels now below the 10-year average of 49,100. While leasing activity has picked up, with most of the demand driven by small occupiers seeking space less than 1,000 square metres, overall take-up levels remain below the long-term average. Tenants remain focus on quality space, capitalising on favourable leasing terms on offer to encourage employees back into workplaces. Demand is expected to be supported by continued population growth and evolving workplace strategies, although centred on offices which have undergone recent refurbishments or those with new fitouts in place.

Vacancy / Rents

With tenant demand picking up, albeit largely driven by smaller occupiers, the Melbourne metropolitan office market vacancy rate recorded a slight decrease, falling to 14.6% in June 2025 from 15.2% as at January 2025, but still remains more than double the long-term average. Urban Property forecast that the vacancy rate of the metropolitan office has peaked for the short term as the pipeline of new supply reduces in coming years. Although the vacancy rate has stabilised, as tenants have increasingly become more cautious, prime rents face downward pressure as tenants explore alternative markets. Over the 12 months to June 2025, prime metropolitan office rents marginally increased while secondary metropolitan office rents remained steady over the year. Looking ahead, Urban Property Australia forecasts that prime rents will marginally increase through the short term with the vacancy rate remaining elevated. In contrast, secondary office rents are projected to remain under downward pressure as occupiers seek to capitalise on better quality space which is highlighted from the recent trend of tenant moves.

CBD, St Kilda Road & Southbank Office Markets

The vacancy rate of the Melbourne CBD office market was steady over the six months to January 2025, as stock withdrawals aided the negative net absorption. According to the Property Council of Australia, the total Melbourne CBD office vacancy rate remained stable at 18.0% as at January 2025, albeit its highest rate since 1997. In comparison to the other Australian CBD office markets, Melbourne’s vacancy is higher than all other markets with Sydney’s CBD vacancy rate sitting at 12.8% and Brisbane at 10.2%. According to the PCA, the Melbourne CBD office market recorded negative net absorption of 44,962 square metres in the six months to January 2025, the fifth consecutive negative period of net absorption. Although tenant demand in the Melbourne CBD office market remained subdued due to economic uncertainty and the impact of hybrid work patterns, there has been an evident increase of tenants relocating or expanding into the CBD. In the six months to January 2025, B-grade office stock outperformed all other grades in the Melbourne CBD with Premium-grade, A-grade and C-grade offices all recording negative net absorption in the six months to January 2025. Prime net effective office rents marginally increased over the year to June 2025 with incentives seemingly having now peaked however competition amongst owners has meant prime incentives remain close to historical high levels. Reflecting the number of prime office vacant opportunities and competition for tenants, secondary net effective rents have remained steady through the 12 months to June 2025.

Outside of the CBD, the vacancy rate of the St Kilda Road office market increased in the six months to January 2025, to 29.3%, its highest level on record . Elsewhere the vacancy rate of the Southbank office market decreased to 17.6% as at January 2025, almost double its 10-year average. Although the vacancy rates of both the St Kilda Road and Southbank’s office markets are elevated; Urban Property Australia anticipates the completion of the Anzac railway station in September and the completion of the rejuvenation project of Southbank Boulevard will stimulate tenant demand for both markets in the medium term. Similar to Melbourne’s other office markets, transactional activity remains relatively subdued in both Southbank and St Kilda Road office markets with only two offices sold for more than $10 million across the two office markets with sales volume totalling almost $45 million in 2025 to date.

Melbourne Office Net Absorption

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