The Sydney CBD office market finished 2025 amid ongoing structural change, with elevated vacancy moderated by continued tenant interest in premium space. While headline figures show supply outpacing demand, the performance gap between prime assets and older secondary buildings has widened significantly, underpinning a persistent flight to quality across leasing and investment markets.
New supply keeps vacancy elevated
Overall CBD office vacancy remained high through Q4, tracking around 13.7%, a level largely driven by recent completions and ongoing deliveries. This continues the trend observed earlier in the year, when vacancy rose as new supply hit the market faster than tenants could absorb it.
Deliveries of premium and refurbished space — particularly around key precincts — have contributed to this backdrop, even as occupier demand has focused selectively on the best buildings. According to Tenant CS estimates, the supply pipeline will tighten in the near term, with limited significant new completions expected until 2027.
Leasing demand remains measured but positive
Leasing activity in Q4 was steady, with tenant demand increasingly concentrated in larger floorplates and higher-quality buildings. Across 2025, average enquiry sizes have grown, reflecting an uptick in demand from corporate occupiers seeking 1,000 sqm+ footprints — a sign of consolidating occupier strategies rather than broad-based expansion.
CBRE data for earlier parts of 2025 showed enquiry volumes totalling over 120,000 sqm in Q3 alone, the highest quarterly tally in several years, signalling underlying demand despite challenging overall vacancy.
This pattern has continued into Q4, with larger occupiers driving much of the active leasing pipeline while smaller tenants fill gaps in secondary stock, albeit with longer decision timelines.
Rent trends show premium growth, secondary strain
The divergence in rental performance across building grades has become more pronounced:
- Premium-grade net effective rents continued to rise in Q4, building on earlier year performance. Annual growth for high-quality space sat at around 7%, with incentives holding relatively steady in the mid-30% range, indicating sustained occupier interest in best-in-class stock.
- A-grade rents also posted modest gains, up roughly 3% year-on-year, though elevated incentives continued to moderate effective returns.
- Secondary buildings faced ongoing pressure, with effective rents declining and incentives climbing above 40%, reducing occupier cost competitiveness. Data shows the widening performance gap between prime and secondary space remains a defining feature of the market.
These trends reflect persistent preference for quality locations with superior amenity and sustainability standards, consistent with broader office leasing patterns in Sydney and other major cities.
Investment interest rising, yields stable
Investor sentiment improved toward the end of the year, with transaction activity concentrated in well-located properties with strong tenant covenants. Late-cycle transactions in prime CBD space helped stabilise yield metrics, which remained relatively unchanged through Q4.
Prime office yields held around the low-6% range, a sign that core assets continue to attract capital, while secondary yields stayed higher as investors priced in greater leasing and income risk. The selective nature of recent deals suggests improved confidence among buyers targeting long-term income security.
Economic backdrop supportive but cautious
Macroconditions continue to influence occupier and investor behaviour. National GDP growth softened slightly toward the end of 2025, and inflation remained above the Reserve Bank of Australia’s target band. However, unemployment stayed relatively low in the low-4% range, supporting office utilisation and underpinning leasing activity across quality stock.
Growth forecasts for New South Wales remain positive going into 2026, providing a constructive backdrop for Sydney’s office market even as supply pressures persist in the near term.
Outlook — quality outperforms into 2026
Looking ahead, the Sydney CBD office market is expected to remain uneven:
- Premium and prime assets should continue to benefit from selective demand and stable incentives, supported by limited direct competition from new supply in the immediate pipeline.
- Secondary stock will likely face continued leasing challenges, with incentives elevated and effective rents under pressure as tenants prioritise quality and amenity.
Knight Frank research suggests that future supply of large-scale premium space will be relatively limited through 2027, with over 60% of pipeline space already pre-committed and a relatively small amount of new leasable premium stock coming online. This is expected to tighten the supply/demand balance and support rental growth in the long term.
As development slows and the market settles, vacancy could gradually stabilise through 2026, shifting focus back toward occupier fundamentals and positioning for a more durable recovery.
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