Are structural issues distorting Melbourne’s vacancy

Melbourne’s CBD office vacancy sits at 19.7% as of Q1 2026, a figure implying abundant tenant options and a competitive landlord environment. However, analysis of recent vacancy patterns reveals an integral distinction between frictional, entrenched, and structural vacancy, suggesting Melbourne’s office market dynamics and associated tenant leverage are more nuanced than headline figures indicate.

JLL research identifies that approximately 4.0% of Melbourne CBD’s vacant stock could be considered structurally vacant. Structural vacancy has been identified where secondary assets have maintained vacancy above 5% for four consecutive quarters, with this vacancy either increasing or remaining unchanged over the past two years. This methodology focuses on older buildings most likely nearing obsolescence, where office may no longer represent the property's highest and best use.

Figure 1: Melbourne CBD vacancy by classification

Source: JLL Research

However, this rudimentary analysis only examines secondary assets. With prime-grade vacancy at 18.8%, it raises the question of whether some higher-quality assets could also be harbouring entrenched vacancy. Broadening the analysis to include prime stock using identical criteria reveals an additional 6.0% of stock exhibits persistent “entrenched vacancy”.

This analysis indicates that of the headline 19.7% vacancy figure, only 9.7% would likely be considered by tenants seeking quality, well-located space today.

Supply has been the major driver behind elevated vacancy, and age profile analysis suggests it has also accelerated the rate of obsolescence. From Q1 2020 to Q1 2026, 675,000 sqm of new office space completed construction in Melbourne's CBD, equivalent to 12.5% of total stock delivered in just six years. This compares to Sydney CBD's 414,000 sqm over the same period (7.7% of total stock), highlighting Melbourne's disproportionate supply surge. This wave of new, amenity-rich buildings has coincided with evolving tenant expectations post-pandemic and left older assets struggling to compete. Buildings from the 1980s or earlier represent 58.4% of secondary stock and contain 120,500 sqm of structural vacancy. A further 69,800 sqm sits vacant in buildings spanning the 1990s to 2010s, with concentration heavily skewed toward earlier decades. This age profile confirms structural vacancy correlates directly with building obsolescence.

Structural and entrenched vacancy are distinctly concentrated within precincts, highlighting location as a key factor. The Western Core accounts for 64.9% of structurally vacant space, which reflects its largely 1980s or earlier stock composition and associated secondary asset concentration. Docklands holds 54.8% of identified entrenched vacancy (followed by Western Core at 24.1%), reflecting its newer prime stock developed from the 2000s onwards. This geographic split demonstrates that precinct positioning and building age are intertwined drivers of structural vacancy; Western Core's obsolescence challenges differ fundamentally from Docklands' market absorption difficulties.

Figure 2: Melbourne CBD vacancy by precinct and classification

Source: JLL Research

The headline figure may be 19.7%, but our analysis indicates a distinctly fragmented market where potentially only 9.7% of stock is competitive. Purpose-built student accommodation and build-to-rent residential have emerged as conversion candidates for obsolete stock. However, with persistent domestic inflation, and global tensions impacting input costs, feasibility remains strained. As Melbourne's office market evolves, distinguishing between frictional vacancy that will absorb with demand recovery and structural vacancy requiring fundamental repositioning will be critical for investors, occupiers, and policymakers.