2026-03-05-莱坊-Melbourne_Economic_Rent_Report_Q1_2026_8页_1mb

Summary of Melbourne CBD Office Market Trends

Core Content

The Melbourne CBD office market is currently facing significant development constraints due to a wide gap between economic rents and forecast rents. This gap is primarily driven by rising construction costs, elevated interest rates, and reduced yields, all of which have increased the financial hurdles for new developments.

Key Insights

• Economic Rent vs Forecast Rent:

  • Economic rent for a new premium office tower in Melbourne CBD is estimated at $1,348/sqm in Q4 2025.
  • Forecast rent, assuming a 4% annual growth, is expected to reach $951/sqm by Q4 2028.
  • The gap between economic and forecast rents is 42%, indicating that current market conditions are not sufficient to make new developments financially viable.

• Historical Growth:

  • Economic rents have surged by 135% since Q1 2021, far outpacing the 16% increase in premium rents.
  • As of Q4 2025, premium office rents are at $845/sqm, and are expected to rise to $951/sqm by Q4 2028.

• Development Pipeline:

  • The supply of new office space is expected to remain constrained, with an average of 56,400 sqm per year over the next five years, which is 42% of the average over the last twenty years.
  • Most new supply will be delivered in 2026, with very limited new developments expected after that.
  • The next major premium office development, 600 Collins St, is projected to be completed in 2029-30.

• Market Variability:

  • Not all precincts in the Melbourne CBD are equally affected. The Eastern Core is closer to economic rent viability than other areas.
  • The North Eastern precinct and Flagstaff require rents over 100% higher than forecast to be viable.
  • Projects with lower site costs or existing sunk costs may be more viable earlier in the development cycle.

Development Feasibility and Timeline

• Feasibility Constraints:

  • Economic rents are well above forecast rents, creating a pricing conundrum for developers.
  • Developers are hesitant to start new projects until the gap between economic and forecast rents narrows to a more comfortable level, expected by Q3 2030.
  • New supply is expected to fall to below 1% of total stock and remain there into the 2030s.

• Model Assumptions:

  • A 10-year discounted cash flow (DCF) model is used to estimate economic and forecast rents.
  • The model assumes:
    • A 4% annual rent growth during the construction and hold periods.
    • $7,000/sqm construction cost in Q1 2025, growing at 3% p.a..
    • 60% of project costs are funded by debt.
    • A 10% IRR target.
    • 2.5% annual CPI growth.
    • 7-year lease term for calculating incentives.
    • A -0.25% difference between new office tower yield and average premium office yield.

Drivers of Economic Rent Gap

• Construction Costs:

  • Construction costs in Melbourne have risen by 54% since Q1 2021, driven by global and domestic supply-side pressures.
  • Material costs have increased by over 70%, and construction wages by 17%.

• Interest Rates:

  • The Reserve Bank of Australia (RBA) raised interest rates significantly since 2022, increasing funding costs and hurdle rates for developers.
  • Despite a recent decline, interest rates remain elevated compared to the past decade.

• Yields and Capital Values:

  • Prime office yields have increased by 200 bps since Q1 2021, reducing capital values by 19%.
  • Yields influence capital values, which in turn affect the feasibility of new developments.

• Leasing Incentives:

  • Leasing incentives have nearly doubled from 25% (net) in Q1 2019 to 48% (net) in Q4 2025.
  • These incentives have weighted on rental growth and reduced net effective rents.

Market Outlook

• Economic Rents Likely to Peak:

  • Economic rents are expected to fall to around $1,200/sqm by late 2028 before stabilizing.
  • This decline is due to falling yields and rising forecast rents.

• Supply Constraints:

  • The development pipeline is slowing markedly, with many projects being deferred.
  • The CBD is experiencing a prolonged supply squeeze, which is expected to continue into the early 2030s.

• Market Impact:

  • The extended period of low supply will reshape the Melbourne CBD office market for years to come.
  • Developers are cautious about starting new projects until the economic rent gap narrows.

Methodology and Forecasting

• Economic Rent Forecasting:

  • Economic rent is calculated based on the rent level required to achieve a 10% IRR.
  • The DCF model is used, assuming a three-year construction period and four-year hold period.
  • The model includes various costs such as stamp duty, land tax, leasing agent fees, and professional fees.

• Forecasting Assumptions:

  • Premium NFR rent growth: 4.5% p.a.
  • Secondary NFR rent growth: 2.5% p.a.
  • Outgoings: 2.5% p.a.
  • Construction cost growth: 4.0% p.a.
  • Premium yield: -0.7% (Q4 2025 to Q4 2030)

Conclusion

The current market conditions in Melbourne CBD make it challenging to start new office developments due to the wide gap between economic and forecast rents. Developers are deferring projects and reducing new supply. However, there is an expectation that economic rents will fall over the next few years, potentially improving feasibility for new developments. The market is expected to remain constrained until the late 2020s, with limited new supply beyond 2026.