Premium office space drives sharp rental surge across Australia’s CBDs
Office rents in Sydney, Melbourne and Brisbane are climbing at their fastest pace since the pandemic as tenants compete for premium CBD space amid tightening supply.
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Australia’s major CBD office markets are recording some of their strongest rental growth since the pandemic, with businesses increasingly prioritising premium office space despite elevated geopolitical and economic uncertainty.
Knight Frank’s Australian Office Indicators Q1 2026 report found net effective rents in Sydney and Melbourne CBDs rose at their fastest annual pace since COVID-19, increasing 10.2 per cent and 6.8 per cent respectively over the 12 months to March.
Brisbane posted the strongest growth nationally, with net effective rents climbing 11.7 per cent over the same period.
The report points to a widening divide between prime CBD office towers and secondary office stock, as occupiers increasingly focus on quality, location and workplace amenity when making leasing decisions.
Knight Frank Senior Economist, Research & Consulting Alistair Read said demand remained heavily concentrated in premium assets within core CBD precincts, helping drive stronger rental growth in top-tier buildings.
“Occupier demand continues to be heavily concentrated in the most desirable CBD precincts and the highest-quality buildings, accelerating a sharp divergence between core and non-core markets,” Mr Read said.
According to the report, Sydney’s Core precinct and Melbourne’s Eastern Core significantly outperformed broader CBD markets over the past year.
“In Sydney’s Core precinct and Melbourne’s Eastern Core, net effective rents surged 14.3% and 16.1% over the past year, significantly outperforming the rest-of-CBD precincts,” Mr Read said.
The rental gap between prime and non-prime office locations has also continued to widen sharply.
“As a result, core CBD rents are now 54% higher than non-core locations in Sydney and 93% higher in Melbourne, highlighting the growing premium placed on amenity, accessibility and workplace quality,” he said.
Knight Frank said the strong rental growth across the major CBDs was being underpinned by a limited supply pipeline, with few new office developments expected to be delivered in the near term.
Mr Read said subdued construction activity was likely to support ongoing rental growth and tighter vacancy rates over the medium term, particularly for premium office towers.
“The combination of sustained demand and declining levels of new development will aid ongoing prime rental growth and lower vacancy rates over the medium term, particularly for best-in-class assets,” he said.
The report noted that current economic conditions were making new office developments increasingly difficult to justify financially.
“Economic rents remain well above expected market rents, making the construction of new office towers largely unviable, and concentrating tenant demand into existing buildings,” Mr Read said.
While suburban office markets generally remained subdued compared with CBDs, Melbourne’s Southbank precinct was identified as a relative outperformer, recording annual net effective rental growth of 2.7 per cent.
The report comes as broader Asia-Pacific office markets continue to stabilise following several years of disruption linked to hybrid work trends, inflation and rising interest rates.
Knight Frank’s separate Asia-Pacific Q1 2026 Office Highlights report found Sydney and Brisbane were among the strongest-performing office rental markets in the region, behind only Bengaluru and Tokyo for annual prime net face rental growth.
The Asia-Pacific report also found 18 of the 24 cities monitored across the region recorded stable or increasing rents in the first quarter of 2026, even as geopolitical uncertainty intensified following escalating conflict in the Middle East.
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Australia’s housing market was flat in May as falling values in Sydney and Melbourne offset continued growth in Perth, Brisbane and Adelaide.
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Australia’s housing market has lost momentum, with Cotality’s latest Home Value Index revealing national dwelling values were flat in May as affordability constraints, higher borrowing costs and weakening buyer sentiment continue to weigh on demand.
The national result masks increasingly divergent conditions across the country.
Sydney and Melbourne led the decline, with dwelling values falling 0.9 per cent and 0.8 per cent respectively over the month.
Sydney values are now 2.1 per cent below their November 2025 peak, while Melbourne values sit 3.2 per cent below their March 2022 high.
In contrast, Brisbane, Perth and Adelaide continued to record growth, although even the stronger-performing markets are beginning to show signs of slowing.
Perth again led the capitals, recording monthly growth of 1.5 per cent and annual growth of 25.8 per cent. Brisbane values increased 0.9 per cent in May and are now 19.1 per cent higher than a year ago, while Adelaide recorded a 0.5 per cent monthly rise and annua growth of 12.3 per cent.
Cotality Research Director Tim Lawless said Australia’s housing market continues to operate at vastly different speeds depending on location.
“We are continuing to see multi-speed conditions across Australia’s housing sector, with Perth and Melbourne at opposite ends of the spectrum,” Lawless said.
“The past five years have seen these cities diverge sharply, with Perth values up a stunning 91.4 per cent while Melbourne home values are only 3.3 per cent higher since May 2021.”
Lawless said while the pace of value growth remains highly varied between cities, a common trend is emerging.
“While the speed of value change remains very different from city to city, the direction is becoming more consistent, with most markets losing momentum as demand-side headwinds intensify.”
The slowdown is becoming increasingly evident in transaction activity.
National home sales over the past three months were estimated to be 2.2 per cent lower than a year ago and 4.1 per cent below the five-year average.
Sydney and Melbourne recorded the sharpest declines in sales activity, down 17.0 per cent and 14.2 per cent respectively compared to the same period last year.
Lawless said higher listing volumes are shifting negotiating power back towards buyers.
“These are also the cities where advertised supply has risen to above average levels, providing more choice and better leverage for buyers,” he said.
The softer conditions come despite ongoing supply constraints across much of the country. Construction costs remain elevated and feasibility challenges continue to limit new housing delivery, even as governments in NSW and Victoria continue to implement planning reforms designed to accelerate approvals and increase apartment supply.
For the new apartment sector, the data highlights an increasingly important divide between established housing markets and the off-the-plan market.
While detached housing markets in Sydney and Melbourne continue to soften, the supply of new apartments remains well below the levels required to meet population growth and federal housing targets.
This imbalance is likely to continue supporting demand for new apartment stock, particularly in major urban centres where affordability pressures are forcing more buyers towards higher-density housing options.
The latest rental figures also reinforce the underlying strength of housing demand.
National rents increased another 0.6 per cent in May, taking annual rental growth to 5.9 per cent. Vacancy rates remain at just 1.5 per cent nationally, matching the record lows experienced during the post-pandemic migration surge.
Lawless said renters are increasingly reaching affordability limits.
“With renters dedicating around a third of their pre-tax income to rental payments, it’s uncertain how much longer this upswing in rents can last,” he said.
The housing slowdown is unfolding against a backdrop of improving inflation data and growing confidence that interest rates will remain on hold when the Reserve Bank meets in June.
Australia’s monthly inflation indicator has continued to trend lower in recent months, reinforcing market expectations that the RBA is unlikely to lift the cash rate again in the near term.
Financial markets and economists have increasingly shifted their focus towards the timing of future rate cuts rather than the prospect of further tightening.
While the RBA remains cautious about services inflation and housing-related costs, recent inflation outcomes have largely eased concerns that another rate rise would be required.
That is providing some support to housing sentiment, although affordability and borrowing capacity remain significant constraints.
For now, Cotality’s data suggests the housing market is entering a more subdued phase rather than facing a sharp correction.
Affordability pressures, weaker confidence and slower sales activity are weighing on demand, while population growth, tight rental markets and constrained housing supply continue to provide a floor underneath values.
The result is a housing market that remains highly fragmented, with Sydney and Melbourne continuing to cool, while Perth, Brisbane and Adelaide remain in growth mode, albeit at a slower pace than seen over the past two years.
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