Melbourne’s office middle market: what’s happening right now?

Despite headline vacancy rates and shifting market dynamics, Melbourne’s office Middle Markets presents momentum and opportunity. Jack Ainsworth, JLL Senior Executive, Office Leasing and Sophie Tadgell, JLL Tenant Representation Consultant discuss the key trends they are seeing in market.

Global uncertainty is a big factor in the market at the moment. While tenant demand remains strong, decision making processes have slowed considerably for businesses awaiting approvals from global headquartered businesses. This represents an artificial downturn in market activity, where local clients who are eager to secure space, await approval. However, as we start to move into the back end of 2025, we anticipate a strong finish to the year, with many tenants looking to accelerate and finalise their deals before the years end.

Although headline vacancy rates remain elevated, high quality stock is in demand, driving the gradual return of competitive market conditions. This trend is evident in the elasticity of incentives. While incentives remain high, they are no longer increasing at the same pace as rents, and in some cases, they are beginning to contract which is driving effective rental growth, especially in precincts where the vacancy is tightening, such as the Eastern Core where prime vacancy is sitting around 6%.

From a tenant’s perspective, it remains the opportune time to consider ‘flight to quality and flight to value’ priorities. Occupiers are increasingly gravitating toward fully fitted, ‘plug and play’ office solutions that have efficient floorplate usage, flexibility in lease terms, premium-grade building amenities, access to public transport and high connectivity. This dual focus on quality and value is reshaping tenant expectations across the market.

For landlord’s, delivering both high incentives and the turnkey, speculative fitouts which tenants are demanding can be a challenge, particularly for private landlords. Rising construction costs are making it increasingly difficult to justify speculative investment. However, landlords who are strategic in repositioning assets and finding cost effective, creative ways to differentiate their product will see strong results. Investing in enhanced amenities, third party facilities, business lounges, and sustainable credentials are becoming prevalent. Buildings that are future ready are increasingly capturing tenant interest, particularly those offering flexible solutions to address ongoing uncertainty about workspace needs.

The market is approaching an inflection point. As supply begins to tighten and incentives plateau or decrease, effective rents are projected to rise from Q4 2025 onward. This shift is creating more urgency for occupiers to enter the market well before their lease expiry and leverage current conditions. Forward thinking tenants are engaging with their tenant representatives early to explore all relocation, renewal and restructure options that generate savings before they miss the ‘tenant favourable’ window. With limited development pipeline and strong pre commitments rates, suggesting a shift in landlord’s favour, tenants should act now to leverage current market conditions.

A significant centralisation trend has emerged, with tenants moving from fringe markets such as St Kilda Road into the CBD. This trend is driven by better amenity and minimal cost differences, with the rent gap between the CBD and fringe is the narrowest on record, just $15/sqm in prime net effective terms. In Q1 2025 alone, JLL recorded 41,600 sqm of this activity. Tenants are seeking buildings that align with flexible, connected and high quality offerings, and the CBD is increasingly meeting that demand.

During COVID many tenants made dramatic workspace adjustments, either significantly reducing or expanding their footprints. As the post pandemic world stabilises, and tenants are in the process of right-sizing their space, there is a genuine demand for flexible solutions, including access to third-party amenities and spaces within buildings to address ongoing uncertainty about headcount needs.

Melbourne’s office middle market is heating up. Proactive landlords are prioritising creating distinctive offerings, and tenants are capitalising on quality and flexibility. The key to success in the current market is forward thinking and partnering with the right property advisor to navigate current market conditions.