Office Eyes Slowdown as New Stock Supply Becomes a Trickle

Global capital is drifting back into Australian offices—cautiously. Falling interest rates and the pull of a stable market are drawing some investors in, while stubborn pricing gaps and a soft economy keep others on the sidelines. Vacancy is expected to hit about 16 per cent by late 2025, according to Macromonitor’s Australian Office Construction Outlook , as the last wave of new supply comes online—a high point before conditions are expected to tighten. Behind those numbers is a market running at two speeds. Premium CBD towers are leasing, while older CBD and metro stock is being gutted, refitted or converted. Tenants are chasing high-amenity space with strong sustainability, wellbeing and management credentials. Offshore investors are weighing currency shifts, global capital flows and where office sits in their portfolios. Inside workplaces, AI is moving from hype to practical tool, shaping how space is planned, managed and used. During the next two years, these forces will decide who pulls ahead, who adapts—and who’s left behind. Vacancy peak driven by supply Blake Willis, economist at Macromonitor and author of the Australian Office Construction Outlook , says the vacancy peak stems from the wind-down of a long construction run, not a sudden drop in tenant demand. ▲ Blake Willis, economist at Macromonitor and author of the Australian Office Construction Outlook . “I’d say the peak is mainly due to the pipeline drying up and it’s been fairly strong for the past ... five to six years before Covid,” he says. He calls it “a lingering effect of Covid”, with projects launched before the pandemic still completing even as demand slumped. The result, he says, has been “all this space being added” but not enough “demand to offset this rising supply”. Most projects will be finished by the end of next year, with Sydney feeling the slowdown first. Vacancy in the city is forecast to peak just under 18 per cent in late 2025 before easing to around 15 per cent by 2027 as the last major projects come online. Melbourne’s path back will be slower. “There really is a bit more work to be done… the pipeline is still—there’s a bit to go in Melbourne, which is keeping vacancy higher than Sydney for the next couple of years,” Willis says. Brisbane is holding its ground with low vacancy and strong rent growth. Willis says there are “only a handful of buildings” under construction and commitment to them is already very high. Even once they complete, “they really won’t have an impact on supply. So rental yields should stay fairly high”. ▲ Source: The Urban Developer He expects interest rate cuts to flow through from mid-next year, boosting employment growth and in turn office demand. “That will definitely contribute positively to reducing the vacancy rate across most capital cities in the next few years,” Willis says. Flight to quality and market tightening The slowdown is clear in the numbers. Macromonitor’s report shows the value of office commencements fell 22 per cent in 2023-24 and is down another 10 per cent in the first nine months of 2024-25. Willis says much of the change comes from a “flight to quality”, with employers and staff favouring premium or A-grade space over lower-grade B or C stock. Many older buildings are being withdrawn for conversion—either upgraded to premium standard or repurposed for residential use—a trend he links both to tenant preferences and housing pressures. The gap between CBDs and metro markets is also widening. Vacancy in suburban hubs, for example Chatswood and Macquarie Park, is “skyrocketing compared to the CBDs” as transport links make it easier to get into the city, where “all the premium offices are”. Capital flows in a cautious market Investor appetite for Australian office assets is returning, but slowly, MaxCap Group head of research Bruce Wan says. ▲ MaxCap’s Bruce Wan says office investor appetite is returning but caution remains. “After an interesting ride since the pandemic, investor appetite is slowly coming back for the Australian office sector. However, the mood is still cautious as there are mixed signals,” he says. Wan says performance is splitting along city lines—Brisbane is still performing well, Sydney is improving and Melbourne remains the biggest laggard. “On the upside, Australia is still a stable place to invest, interest rates are falling and office values are rising again. “On the downside, business conditions are a little downbeat and major tenants—particularly in the tech and banking sectors—are slimming down their headcount rather than bulking up.” Other asset classes are ahead. Wan says “investor returns are currently stronger in living, retail and industrial sectors” and expects “that ranking is likely to hold into the next year”. Large conservative investors remain hesitant, waiting for more consistent improvement in occupancy, rents and capitalisation rates. “Altogether, we still see a slight mismatch between seller and buyer price expectations,” Wan says. “Until that gap is closed, we expect transaction flows to remain subdued … there has been a big pivot in global allocation to ‘beds and sheds’ … alongside emerging sectors like data centres and life sciences, which is still weighing down appetite for office assets.” ▲ Source: The Urban Developer Even with those challenges, Wan says Australia stands out. “We’re still set for modestly lower interest rates … our outlook still points to stronger growth and improving commercial real estate returns. “On balance, global investors are still very happy to be in Australia—even as an overweight allocation—given our market’s stability, accessibility and transparency.” Currency positioning is another driver. “There is a clear theme for US de-dollarisation taking hold, with Australia likely to be a beneficiary of this repositioning,” Wan says. Changing workplaces and tenant priorities The modern office is no longer just a place for individual work, JLL real estate economist and director Ronak Bhimjiani says. ▲ JLL real estate economist and director Ronak Bhimjiani says AI and tenant expectations are reshaping demand for premium office space. “It’s transforming into a vibrant hub designed for collaboration, social connection and enhanced employee experience,” he says. “Tenants are actively seeking spaces that go beyond basic functionality, prioritising amenities that attract and retain talent.” Technology is now a core part of this shift in expectations with tenants “increasingly looking for buildings equipped with AI-enabled systems to create efficiencies”. JLL’s Global Future of Work Survey shows 41 per cent of operations now combine manual and AI-driven processes—a sign, Bhimjiani says, while AI is becoming more important, human expertise remains crucial. The technology focus is sharpening the divide between asset grades. “Prime and A-grade buildings are leasing quickly, while older, secondary-grade assets face ongoing occupancy challenges … superior amenity, advanced technology infrastructure, strong [sustainability] and flexible design solutions are critical for attracting and retaining talent in a competitive labour market,” he says. Bhimjiani notes the shift to a more office-centric model is gathering pace. ▲ Source: The Urban Developer The JLL survey also finds 44 per cent of organisations now identify as “office advocates”, aiming for employees to be in the office five days a week. Since the pandemic, office design has shifted. “Offices are increasingly being reconfigured to prioritise collaborative zones and social spaces over traditional workstations,” Bhimjiani says. “Companies are leveraging technology to understand and optimise space usage. “AI-powered analytics are also being deployed to identify underutilised areas and inform dynamic space reconfigurations.” Premium pull will strengthen All three experts agree the gap between premium and secondary-grade assets will keep widening. Interest rate cuts should help but execution will matter most. Wan sees the next cycle’s value being driven through “active asset management driving income growth, as opposed to cap rate compression value uplift”. He also says working from home is no longer the drag it once was. “Most businesses and workers have settled on a new equilibrium,” Wan says.

Office Eyes Slowdown as New Stock Supply Becomes a Trickle

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