_Window to start closing for Melbourne office tenants as supply will begin to dry up

Melbourne, Australia – Melbourne CBD office tenants are being urged to act quickly, with a narrowing window to secure space before tightening supply and rising rents shift market conditions decisively back in favour of landlords, according to Knight Frank’s latest research.

The firm’s Melbourne Insights: Is now the time to lease? Q2 2026 report highlights a clear turning point is coming in the market, with occupier demand strengthening, net absorption returning to positive territory and new supply set to sharply decline, creating mounting pressure on availability - particularly for premium, large-format office space.

Since the beginning of 2025, 62% of occupiers leasing more than 1,000 sqm have either expanded or maintained their footprint, signalling the end of the widespread contraction seen in the post-pandemic period.

This suggests the high level of downsizing that characterised the post-pandemic period has largely ended,” said Knight Frank Partner, Head of Research and Consulting, Victoria Dr Tony McGough.

“The data shows a decisive turnaround in occupier behaviour, with demand trending upward since 2013 and turning positive in 2025, as Melbourne’s CBD recorded net absorption of 29,000 square metres last year - its strongest rate since 2018.”

At the same time, net effective rents in Melbourne’s CBD have begun to recover, rising by 4% over 2025 - the strongest annual growth since 2019 - with further increases forecast as incentives gradually unwind.

Knight Frank Analyst, Research & Consulting Laurence Panozzo said: “The dynamics in Melbourne CBD office market have shifted quickly, with demand accelerating, which is set to place upward pressure on pricing for occupiers. Importantly, we’re seeing the end of the contraction cycle, with most occupiers now either maintaining or expanding their space requirements. This is laying the foundation for sustained rental growth, particularly across premium assets where demand is the strongest.”

The research found incentives are expected to remain elevated but fall from their peaks to average 45% by 2030. Consequently, net effective rents are expected to grow at an average annual rate of 5.3% over the next five years while face rents will rise by 4.2% over the same period.

The tightening conditions are being amplified by a looming supply shock, with Melbourne’s CBD set to experience its most significant slowdown in new office development on record, resulting from the large spread between economic and market rents that Knight Frank reported on earlier this year.

“After 2026, there will be no major office projects under construction, with average annual completions forecast to fall to around 34,000 square metres over the next five years - placing downward pressure on vacancy and limiting future tenant choice,” said Dr McGough. “The last time there was such a restriction of new supply, vacancy rates fell by 18.1 per cent.

While this year’s new supply is expected to push vacancy up to 20%, this is expected to represent the peak, with vacancy forecast to fall swiftly thereafter. By 2030 the vacancy rate is forecast to sit at 13%, with premium vacancy closer to 8.5%.

Knight Frank Partner, Joint Head of Office Leasing, Victoria Simon Hale said the supply outlook was creating urgency—particularly for large occupiers with specific requirements relating to location, rise and quality.

“Despite relatively high vacancy on paper, the reality for tenants—especially those seeking high-quality, contiguous space—is very different,” he said.

“The pool of suitable options is more limited for requirements above 4,000sq m and in core CBD precincts such as the Eastern Core and Collins Street.

“Tenants with near-term lease events are increasingly recognising that waiting for more favourable conditions may no longer be a viable strategy, as preferred options are absorbed and competition intensifies.

“As demand strengthens and supply tightens, the market is moving into a new phase where quality space—particularly in prime locations—will become increasingly difficult to secure.”

The Knight Frank report also highlights the growing scarcity of premium-grade space, with only a limited number of large contiguous options remaining across the CBD, and even fewer in sought-after locations or higher-rise buildings.

Of the 33 current prime options above 4,000sq m, 26 are located in Docklands or the Western Core, leaving just 7 opportunities for tenants targeting any other precinct in Melbourne’s CBD. Premium-grade is even more limited, with just 8 options across the whole of the CBD compared to 25 for A-grade.

Knight Frank Director, Head of Tenant Representation – Office in Victoria Craig Carr said: “Tenants should move quickly to take advantage of the options available at present whilst more options are available.

“With net effective rents likely to have bottomed and turning to growth, the key message for tenants is clear—the longer decisions are delayed, the more you are likely to pay.

“The slowdown in supply will mean that over the next five years tenants will have less choice for premium and high-quality office space, creating a compelling case for occupiers to capitalise on current market availabilities before they are gone.”

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For further information, please contact:
Vanessa De Groot – Marketing & Communications, Knight Frank
Vanessa.degroot@au.knightfrank.com +61 410 460211

Notes to Editors
Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, the Knight Frank network has 600+ offices across more than 50 territories and more than 20,000 people. The Group advises clients ranging from individual owners and buyers to major developers, investors, and corporate tenants. For further information about the Firm, please visit www.knightfrank.com.