Stability in Vacancy Rates as Market Faces Key Tests.
The latest Property Council of Australia (PCA) Office Market Report has shown little movement in national office vacancy rates over the past six months, shifting only marginally from 13.6% to 13.7% as of January 2025. Many will look at this as a positive stabilisation of the market. However, the resilience of this position will also be tested over the next six months as 333,000 sqm of new supply enters the market—well above the historical average of 237,500 sqm.
Ultimately, demand will be the key determinant of whether vacancy rates hold steady or shift. In this edition, we look at two key trends that may shape office demand in 2025: interest rates and the return-to-office movement.
Interest Rates
The RBA’s recent 0.25% rate cut leaves Australia in a controversial economic position - cutting rates despite a consistent and historically low unemployment rate. However, the traditional relationship between unemployment and inflation has long been more complex than most politicians are willing to admit, and those with a love of high school economics might enjoy the following read on the Phillips Curve. The Phillips Curve: A Poor Guide for Monetary Policy | Cato Institute
Nonetheless, the RBA’s February rate cut has filled the business pages with some cautious optimism that Australian business confidence could mirror the boost in US business confidence seen late last year.
For comparison, the US rate-cutting cycle, which began in September 2024, saw rates drop from 5.13% to 4.48% by December 2024. This spurred a spike in commercial sentiment, with Wells Fargo research recording its strongest business confidence quarter since 2020.
Likewise, leasing data shows a corresponding increase in net absorption during Q4, moving into positive territory after a long trend of negative net absorption. Positive Net Absorption Grows in Office Market That cycle involved consecutive cuts through October and November 2024, reducing borrowing costs and increasing business confidence. However, the chances of another Australian rate cut are being downplayed already. As such, it remains to be seen if a single 0.25% cut in Australia will be enough to generate a significant uptick in office demand alone.
Return to Office – A Slow but Steady Shift
The debate over this topic remains a hot conversation in which everyone brings a different perspective. It has firmly broken into the Aussie weekend BBQ agenda—now holding its own against the common topics of mortgages, pets, kids, footy, and The Block.
Despite the multitude of orders and announcements coming from the top brass in corporate and government Australia, the most startling trend is the pace of change, or lack thereof.
- NSW Public Sector: It has been six months since Premier Chris Minns ordered public servants to return to work, yet progress has been slow. Many only began to return in February—and even then, only for two or three days per week.
- Corporate Australia: Woolworths is taking a similar approach with a phased program beginning in June 2025. It aims to bring back all team members to three days per week by October 2025.
While some employers may be unhappy with the pace of change and many employees continue to resist it, the main beneficiaries are likely to be the office landlords who own the highest-quality buildings. The “flight to quality” trend is evident, with top-tier office spaces seeing the strongest demand.
Flight to Quality
Premium office buildings are recording healthy demand and are increasingly being used to attract workforces back into the city. This trend is reflected in pre-commitment figures for new office supply;
- Sydney: Almost 50% of all new supply entering the Sydney market by 2027 is already pre-leased
- Brisbane: An even higher 68% of new supply is pre-committed.
- Melbourne: This is a stark contrast, with only 27% pre-committed, aligning to a market where return to work has been the lowest and upcoming supply is of a historically high nature.
With rising supply, interest rate uncertainty, and a gradual but uneven return to the office, the Australian office market is entering a pivotal period. The next six months will be crucial in determining whether stabilisation holds—or whether the sector faces fresh headwinds in 2025.