_Vacancy reductions and rental growth forecast for the Melbourne CBD office market as supply dwindle

In a new report entitled Melbourne CBD – Economic rent to moderate supply, the firm has found there is a greatly diminished supply pipeline of office space in the Melbourne CBD, particularly post 2026.

New Melbourne CBD office supply is forecast to average around 56,400sq m per year over the next five years – just 42% of the average seen over the last 20 years.

Of this new supply, 57% is being delivered in 2026, and post 2026 there is very little expected to be delivered. Only one premium building is projected to be completed after this time, and that is not until 2029-30 – 600 Collins Street, offering 60,000sq m.

According to the research, new supply is going to fall to below 1% of actual stock and remain there until well into the 2030s. This compares to the average increase in stock of 3% per annum over the previous 20 years.

The Knight Frank report found the lack of new supply is directly related to a sharp rise in economic rents - the level of rent at which the construction of a new development becomes feasible – since 2021, due to a significant increase in construction costs, interest rates, a softening in yields (and the resulting fall in asset valuations) and increased incentives.

Economic rents for a new premium office tower in the Melbourne CBD have risen by 135% since Q1 2021, to now sit at $1,348 per square metre.

That’s 42% higher than the $951 per square metre forecast level of actual premium rent upon construction completion, assuming a building was to start being constructed now and completed in Q4 2028.

“Economic rental growth in Melbourne’s CBD has far outpaced premium office rental growth in recent years,” said Knight Frank Partner, Head of Research & Consulting, Victoria Dr Tony McGough.

“While economic rents have more than doubled over the past five years, over the same period premium rents have risen by just 16%.

“This wide gap between economic and forecast rents underscores the challenge of achieving financial feasibility for new office developments in the current market environment.

“As a result, the pipeline for new office supply in the CBD has thinned out, with several projects that had previously stated start dates being deferred or moved to mooted after failing to meet feasibility criteria.

“There is little committed new supply beyond 2028, and we are expecting to see a prolonged squeeze on new supply going well into the early 2030s.

“The good news is that after years of upward pressure, Melbourne CBD economic rents are now likely to have peaked, having already fallen back in Q4 2025, and we expect them to now consistently fall through to 2029. It’s an encouraging shift that points to improving feasibility, but the gap remains wide.

Limited supply will underpin stronger rent performance

The Knight Frank research market rents were forecast to rise as the supply of premium office space tightens, driving increased rental growth.

Premium net face rents are forecast to rise by 3.4% in 2026 and 3.7% in 2027 before accelerating from 2028 with limited new supply, closing the gap on economic rents.

Knight Frank Joint Head of Office Leasing Victoria Simon Hale said the current vacancy rate of 19% in Melbourne’s CBD provided uncertainty concerning getting buildings occupied, but with a limited supply pipeline the market would turn more in the landlords’ favour.

“There has been a rise in incentives and a stalling of rental growth in the West and the Docklands precincts, but with supply increasingly limited, vacancy is expected to fall and rents will slowly correct within the Prime Grade assets,” he said.

“We expect that as the pipeline of new supply tightens late in 2026, rental growth will expand further beyond the Eastern Core, where it has been heavily concentrated to date, down Collins Street, and incentives will slowly start coming in across the CBD.”

Knight Frank Joint Head of Office Leasing Victoria Chas Keogh added: “Whilst we foresee vacancy rates rising further through 2026 - by about 1% - as the end of the office pipeline is completed, we then expect them to fall markedly on the back of a continued recovery in demand and very limited supply from 2027 onwards.”

Some precincts will become viable for development faster

The Knight Frank report found that due to bifurcation in the Melbourne CBD market, certain precincts – especially the Eastern Core – will become viable for development much quicker.

“Melbourne’s bifurcation is both well known, with average Eastern Core net face rents 34% higher than the average CBD,” said Dr McGough.

“Consequently, whilst the CBD is missing the cut for economic rents by over 40%, the Eastern core is within spitting distance, if a suitable site can be found.

“Conversely, the North Eastern precinct needs rents over 100% higher than forecast at present to commence development, with Flagstaff even further out.

“High value projects in choice locations, projects where historic site costs are cheaper or already a sunken cost to the developer will all stack up earlier. For those projects, commencement will be viable much earlier in this latest development cycle.”

What does it mean for tenants?

Knight Frank Partner, Head of Global Portfolio Solutions, Australia & New Zealand Jenna Wallace said: “With new office supply falling, occupiers face reduced choice, particularly for contiguous floors, making early market engagement and renewal strategies increasingly critical.

“Occupiers are seeking leases structured to protect future needs, including greater expansion or contraction rights and first right of refusal on adjacent space.

“Given the rise in construction costs and the way tenants have increasingly relied on landlord-funded fit-outs via incentives, occupiers are driving more value from the deals through base build upgrades,

ESG initiatives, spec suites or swing floors and staged handovers to minimise double rent and mitigate programme risk.”