AI, Centralisation and Backfill Set to Reshape Melbourne Office Market as Obsolescence Accelerates

Melbourne’s office market is entering a new phase of structural change, with Victorian Government rightsizing, newly introduced work from home legislation and macro factors such as artificial intelligence (AI) and tenant centralisation accelerating the divergence between premium CBD office assets and older non-CBD stock, according to a new CBRE report.

Melbourne’s Office Market Future highlights that the CBD will remain the primary beneficiary of occupier demand, while many metropolitan office locations face growing obsolescence as tenants prioritise high-quality workplaces that support talent attraction, retention and productivity.

The report also forecasts no major office developments will commence until 2032 or later, reflecting the increased impact of the Victorian Government backfill space expected to return to the market over 2027 and 2028. 

CBRE Research Manager, Victoria, Cameron Douglas-Perrine, said Melbourne’s office market was experiencing a fundamental shift driven by changing occupier priorities.

“The office market is increasingly becoming a tale of two cities. We’re seeing strong centralisation into Melbourne’s CBD, particularly the Eastern Core and Southern Cross precincts, while many fringe and suburban markets continue to experience negative absorption,” Mr Douglas-Perrine said.

“AI is accelerating the importance of attracting and retaining skilled workers, which in turn is raising the minimum benchmark for what occupiers consider a viable office asset. Location, quality, amenity and workplace experience are becoming increasingly critical, and we expect that trend to intensify over the coming decade.”

CBRE’s research analysed 189 tenant relocations over the past two years and found more than 71,000sqm of net centralisation into Melbourne’s CBD, with businesses moving into the CBD at an 11:1 ratio compared with those relocating out.

Demand was concentrated in a small number of high-performing precincts, including Melbourne’s Eastern Core and Docklands’ Southern Cross precinct. 

The report also forecasts sustained pressure on non-CBD office markets, particularly St Kilda Road, where CBRE expects net office withdrawals to continue over the next decade as older and less competitive assets gradually leave the market. 

CBRE’s Victorian Head of Tenant Representation Diarmuid Killeen noted that occupier requirements had evolved significantly in recent years.

“Tenants continue to place much greater emphasis on workplace quality. Organisations increasingly recognise that their office strategy plays a critical role in attracting talent, supporting culture and improving employee experience,” Mr Killeen said. 

“While Melbourne remains a tenant-favourable market overall, competition is becoming increasingly concentrated in a smaller pool of buildings. The best assets continue to attract strong demand, particularly where they offer premium amenity, strong ESG credentials and a compelling workplace experience.” 

Mr Killeen said the Victorian Government’s decision to rightsize its own footprint, together with the new work from home legislation, was reshaping occupier choices without easing the underlying scarcity of prime space.

“The Victorian Government's rightsizing is likely to return significant backfill to the CBD, and the work from home legislation largely formalises the roughly 60% occupancy Melbourne already runs at,” Mr Killeen said.

“The government backfill space is concentrated in a single building, so the structural tightening in prime high-rise stock continues. For tenants, this provides greater opportunity at the East End, and as occupiers continue to move east, we expect incentives to remain elevated and vacancy to disperse more widely across the CBD and fringe."

The report concludes that Melbourne’s office market will remain highly bifurcated, with rental growth and tenant demand concentrated in a select group of premium assets, while ageing office stock faces increasing pressure from elevated vacancy, changing workplace expectations and ongoing competition for tenants.