Knight Frank experts highlight a notable rise in tenant demand across the national office market over the past year, driven by increased enquiry and inspection levels. With experts providing detailed commentary on the evolving market dynamics in these major cities.

National 

According to Andrea Roberts, Knight Frank National Head of Leasing: 

“Overall, over the last 12 months we have seen considerable relative improvement in tenant demand across all markets, with enquiry and inspection levels increasing as the major markets of Sydney and  Melbourne continue work through post pandemic new norms. 

“There is, however, a continuing pattern in leasing performance based on location of an asset. Again, this is most measurable in Sydney and Melbourne with the vacancy and incentive disparity between  office buildings located in the Core and East End of these cities respectively. It is very much a tale of  “the Best and the Rest”, coming back to the fundamentals of real estate – address and amenity is  everything. 

“Brisbane has led the country in terms of the highest rental growth and incentives remaining flat.  Building costs are also unfortunately increasing but in a negative direction for all participants in the  market as the cost of construction and new fitouts continue to move north.

Queensland has the most pronounced increase in this area, but we are seeing continuing increasing fitout costs impact strategy  around spec fitouts across the rest of the country. As building costs continue to increase, incentives are  not likely to dramatically decrease as tenants require the funding to construct their fitouts. 

“It’s pleasing to see sublease space decreasing in Sydney and stabilising in Melbourne, with similar  thematics applying to this stock. Premium, well-located, high-quality sublease opportunities move  quickly. Poorly located offices with aged fitouts are very challenging to lease at any price point. 

“Demand for new office product remains high nationally as occupiers, whilst generally moving to hybrid working models, are still focused on delivering new workplaces which will encourage high productivity,  collaboration, employee wellbeing and are well-credentialed with ESG ratings.

As the development pipeline faces an impending drought due to pressures on construction costs and financing, eventually this will lead to tighter markets, reduced vacancy rates and continued rental growth throughout the rest of this decade.” 

Sydney 

According to Al Dunlop, Knight Frank Head of Office Leasing, New South Wales: 

“Prime net face rents in Sydney’s CBD rose by 2.1% in Q2, led by the Midtown precinct with 3.6%  growth. Meanwhile, incentives rose from 35% to 36%, largely offsetting the impact on effective rents,  which edged up by 0.3%.

“Tenant demand has been driven by professional and financial services contributing 67% of leasing  activity. Activity has been weighted towards the core precinct, accounting for 76% of lease volumes in  H1 2024.  

“FY24 registered a record year in demand at 493,000sqm vs FY23 being 423,000sqm. 73% of enquiry  resides in the <1,000sqm size range with underlying demand for existing fitted options.  

“New supply is forecast to reach 188,771sqm in 2024. Over-station developments account for most of  the new supply, totalling 154,705sqm across three buildings, with 80% pre-committed.” 

Melbourne 

According to Hamish Sutherland, Knight Frank Head of Office Leasing, Victoria: 

“Prime net face rents have risen by 0.7% in the last quarter following no change in Q1, but this has been  driven predominantly by the Eastern Core (up 2.6%). Incentives have risen 100bps to 47% so net  effective rents have fallen 1.1%. 

“Whilst vacancy rates remain high, enquiries are still coming through and, after a quiet end to 2023, we  have seen two quarters where enquiries are back to their normal post-COVID levels. Demand continues  to be concentrated around the better buildings and the best locations, as shown by the continued growth  in Eastern Core rents. In these locations incentives may well have peaked. Good fitouts are popular and  well-priced B-grade also remain attractive.  

“The development pipeline is slowing rapidly, with below 10-year average deliveries coming out annually  for the foreseeable future. Consequently, we expect these trends to continue as limited new stock comes  on the market in the next couple of years. A recovery in net absorption as the economy strengthens could then see the vacancy rate fall, particularly for the best quality space.” 

Queensland 

According to Mark McCann, Knight Frank Head of Office Leasing, Queensland 

“Prime net face rents in Brisbane’s CBD have grown 4.9% since January 2024 (3% in Q2) led by  sustained uplift in the premium and upper A grade assets. Incentives have stabilised but with continued  high costs in delivery of new fitouts, incentive levels have remained sticky with little major shift  downwards. 

“A continuing trend from many occupiers - sub 1,000sq m - is the preference to secure existing recycled  fitouts to achieve optimum effective rents. Spec fitouts continue to be of appeal with occupiers as it  mitigates risks associated with cost blowouts on new fitouts and delivery delays. 

“Major existing backfill supply options have been pushed into H2 2025/H1 2026 as a result of delivery  delays in new development stock currently under construction.

“We do expect that the vacancy rate will tighten quickly over the next two years as existing backfill space  is absorbed and there will be no new development stock to come online at least until the back end of  2028 and into 2029 at the earliest. 

“New development feasibilities continue to be a challenge due to continued increases in construction  costs, pre-commitment thresholds, extended delivery programmes, economic rent levels, cap rates and  access to capital. 

“That said, for major corporate occupiers with lease expiries from 2028 onwards and who want to  consider new development options, there is a need to activate and engage with the market now to  ensure delivery programmes are able to meet their respective expiry dates in this period.” 

Perth 

According to Rick McKenzie, Knight Frank Head of Office Leasing, WA: 

“The Perth CBD office market continues to perform well with a solid level of transaction activity across  Prime Grade stock. Rents have continued to increase at moderate levels, with incentives decreasing,  driven by limited future supply additions and the overall performance of the WA economy. 

“New supply is leasing well, however elevated construction costs and current interest rates continue to  stifle the introduction of further supply.” 

Adelaide 

According to Martin Potter, Knight Frank Head of Office Leasing SA: 

“Adelaide has had high levels of activity during the last 12 months and with the continuing demand for  new buildings, seen positive effective rental growth in excess of 3.5% in both prime and secondary stock  over the period. We expect this rental growth to continue in Adelaide over the next few years, mainly  due to the new buildings setting new benchmarks for rent, having a positive impact on the rest of the  market. 

“Adelaide experiences the same theme as other cities, being a spread between prime and secondary  stock as the older generation stock experiences higher vacancy levels than new builds. If backfill stock  is not invested in and refurbished this gap will continue to widen. Like all markets with low unemployment  rates, there is strong competition in the war for talent which will continue to drive demand for new supply.” 

Canberra 

According to Nathan Dunn, ACT Head of Agency: 

“The ACT office market is proving to be surprisingly resilient. Of course, there are some key, uniquely  Canberran, challenges that landlords will have to circumnavigate moving forward, if they are to keep  their buildings full.

“There is certainly a looming “two-tier” rental market. Although new build supply is limited, the few sites  that will have soil turned in the next three to five years will have a completely different rent base than  existing stock, caused by elevated construction costs, which then makes anything under a certain  economic rent untenable to construct. This will start to drag the market rents northwards and we are  already seeing evidence of this. 

“Australian Public Service (APS) Department Heads have been told in no uncertain terms to downsize their reliance on contractors, and you can now start to see the on-flow effect of this. Private Sector firms  reliant on Government work are looking for shorter term lease deals, shorter renewals, and certainly  exploring rationalization options.  

“However, vacancy still sits at the lowest level nationally of all core markets, as are incentives, with  rental growth already underway, so we see a positive outlook for Canberra long-term.”