Australian office vacancy has reached its highest level in 31 years, with Melbourne leading the decline at 18.9 percent as remote work and hybrid working models reshape demand for commercial space.
Business & Markets Desk is a contributing writer covering business and public affairs for The Sydney Times.
Australian office vacancy has reached its highest level in 31 years, climbing to 16.1 percent nationally in the six months to July 2026, according to the Property Council of Australia's bi-annual Office Market Report. The figure, which includes city-fringe and major suburban office markets, surpasses the previous peak of 15.8 percent recorded six months earlier and marks the highest vacancy rate since 1995, when the national office market was still recovering from the recession of the early 1990s. Melbourne remains the weakest market, with CBD vacancy at 18.9 percent, followed by Adelaide at 18.4 percent and Perth at 14.5 percent. Sydney sits in the middle at 13.8 percent, while Brisbane and Canberra are the tightest markets at 9.9 percent and 10.2 percent respectively.
The vacancy surge reflects the structural shift in working patterns that began during the COVID-19 pandemic and has persisted as hybrid working models become embedded in corporate culture. The shift has reduced the amount of space that tenants require per employee, with CBRE research indicating that average space per worker has declined from 16 square metres pre-pandemic to 12 square metres in 2026. The reduction is compounded by corporate consolidation, as companies merge previously separate leases into single, higher-quality buildings that better support collaboration and employee attraction.
Melbourne's office market is the most distressed in the country, with vacancy at 18.9 percent reflecting a combination of oversupply and weak demand that predates the pandemic. The city added roughly 200,000 square metres of new office space between 2020 and 2025, much of it in the suburban office parks of the eastern and south-eastern corridors, while tenant demand remained weak due to the city's prolonged lockdowns and the subsequent shift to hybrid working. The oversupply is structural, because the new space was built to serve a pre-pandemic demand profile that no longer exists, and it will take years of population growth and employment expansion to absorb the excess.
Melbourne's vacancy is further exacerbated by the exit of major tenants including Myer, which shifted its headquarters within the city in June 2026, and Austal, which signed a new lease in Fremantle rather than renewing its Melbourne office. The departures are part of a broader trend of corporate headquarters decentralisation, as companies seek to reduce costs by locating in regional cities or consolidating into fewer, larger buildings in the CBD. The trend is negative for Melbourne's suburban office market, which was already struggling before the pandemic and now faces permanent demand destruction.
Sydney's office market is performing better than Melbourne's, but it is still adjusting to the post-pandemic reality. The CBD vacancy of 13.8 percent is below the national average, and the prime vacancy of 7.7 percent is approaching the historical average of 9.1 percent, indicating that the market is stabilising at the premium end. The secondary market, however, remains under pressure, with vacancy of 14.9 percent and declining rents that are making it difficult for owners to justify capital expenditure on building upgrades and sustainability retrofits.
The NAB Commercial Property Survey for the second quarter of 2026 showed that the NSW office property index rose to 38 from 16 in the first quarter, indicating that sentiment among property professionals has improved significantly. The improvement reflects the stabilisation of prime rents and the growing conviction that the worst of the vacancy cycle is over. Expectations for the national office vacancy rate over the next 12 months improved to 10.3 percent in the second quarter survey, down from 11.1 percent in the first quarter, suggesting that industry participants believe the market is past the worst.
Capital values in the office sector have declined by roughly 20 percent from their 2022 peak, according to NAB data, but the decline has stabilised in premium-grade assets where vacancy is tightening and rents are rising. Prime net effective rents in the Sydney CBD rose 3.7 percent year-on-year to $912 per square metre per annum in the first quarter of 2026, while A-grade rents rose 5.2 percent to $747 per square metre per annum. Secondary rents continued to decline, falling 2.8 percent year-on-year to an average of $503 per square metre per annum, reflecting the bifurcation of the market between quality and non-quality assets.
Yields for prime office assets have stabilised at roughly 5.0 to 5.5 percent in the Sydney CBD, which represents a compression of roughly 50 basis points from the 2023 low of 6.0 percent. The compression reflects growing investor confidence that prime rents will continue to grow and that vacancy will remain contained despite the supply overhang. Secondary assets are still yielding 6.5 to 7.5 percent, which is attractive to value investors but carries the risk of further rental declines and capital value adjustments as the market continues to reprice secondary stock. Explore more property market analysis at the Business & Markets hub
The Property Council of Australia's Office Market Report is available at Property Council Australia. NAB Commercial Property Survey data is published at NAB Economics.
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