Further Ray White analysis of Australian CBD office market data from the Property Council of Australia's bi-annual office market report reveals an unexpected trend that challenges the widely accepted "flight-to-quality" narrative. Australian CBD prime (premium and A-grade) vacancy rates have continued to trend upward since 2020, now sitting at 13.4 per cent, while secondary market (B, C, and D-grade) vacancies have stabilised around 14.4 per cent. This narrow 100-basis-point spread between prime and secondary vacancies highlights how affordability is increasingly driving occupier decisions, with many businesses prioritising cost-effective solutions over premium specifications.

The non-CBD markets tell a somewhat different story, with a more pronounced divide between prime and secondary assets. Prime grade vacancies have improved to 15.5 per cent from 17.2 per cent twelve months ago, though remaining significantly above the sub-10 per cent levels seen pre-COVID. Secondary markets face more challenging conditions with vacancy at 18.8 per cent, continuing a historical pattern of double-digit vacancy rates in these markets.

As companies intensify their return-to-office initiatives, construction costs have emerged as a critical factor shaping market responses. Limited builder availability, rising material costs, and labour shortages have pushed development costs to unprecedented levels. This dynamic, combined with the substantial economic rents needed to justify new development, continues to favor strategic refurbishment over new construction for many owners - a trend similarly observed in the US market, where older buildings with “good bones” in optimal locations are increasingly being targeted for renovation.

CBD refurbishment projects are gaining greater traction, with 16 projects either under construction or highly likely to proceed, adding 207,167sqm of upgraded stock nationally. The non-CBD market is seeing similar activity, with over 78,000sqm of refurbishment projects advancing across the country. In contrast, while more than 544,000sqm of new CBD development supply is currently under construction, the remaining 1.7 million sqm across 54 proposed projects appears likely to remain on hold, allowing time for market absorption. Similarly, in non-CBD markets, only 120,000sqm of the proposed 600,000sqm new pipeline is currently under construction.

The growing emphasis on ESG credentials, particularly NABERS ratings, remains a crucial factor in the market. However, the vacancy data suggests occupiers may be taking a more pragmatic approach, seeking assets that meet minimum sustainability requirements without necessarily demanding premium specifications.

This market dynamic presents a compelling case for strategic refurbishment of well-located secondary assets. Rather than pursuing comprehensive premium-grade upgrades, owners might find better returns in focused improvements that meet minimum ESG requirements while enhancing key amenities. The relatively stable secondary market vacancy rate suggests occupiers are willing to consider these assets when they offer the right combination of value, location, and practical improvements.

Looking ahead, as workplace attendance continues to evolve, the market appears to be moving toward a more balanced view of office accommodation, where affordability and functionality play larger roles in occupier decisions. This shift mirrors trends seen in major US markets, where cost-conscious tenants are increasingly considering well-renovated secondary assets as alternatives to premium space. The significant pipeline of refurbishment projects, particularly in CBD locations, indicates owners are responding to this shift with targeted upgrade strategies rather than wholesale redevelopment. For investors and owners, this presents an opportunity to pursue strategic refurbishment that addresses essential occupier requirements without the substantial costs associated with premium-grade transformations.

By Vanessa Rader Head of Research Ray White Group