The headline number hides two very different markets
The Property Council of Australia's July 2026 Office Market Report put national office vacancy at 16.1%, up from 15.8% six months earlier, the highest reading since 1995. But the national average blends two markets moving in opposite directions. CBD vacancy barely moved, ticking up from 14.8% to 14.9%, and CBD markets collectively recorded positive net absorption over the half, meaning tenants took up more space than they handed back. Non-CBD markets told the opposite story, rising to 18.9%, with the sharpest deterioration in fringe and suburban office precincts: Melbourne's Southbank, and Sydney's Macquarie Park, Parramatta and Chatswood. Premium-grade space actually tightened, down 1.2 percentage points to 10.2%, as the flight to quality that has defined the post-pandemic office market continued. On the numbers alone, "is it supply or demand" already has two different answers depending on which slice of the market gets measured.
For premium space, this looks like a supply story
Colliers' February 2026 analysis argued the recent rise in headline vacancy has been overwhelmingly supply-driven, while underlying occupier demand, particularly for high-quality space, has stayed resilient; the firm forecasts national gross office supply volumes in 2026 will fall to around half the long-term average as construction costs and financing conditions keep new towers off the drawing board. Cushman & Wakefield's August 2026 update described the market as shifting from demand to supply: occupier confidence and leasing activity improved across most capital cities in the first half of 2026, but a tightening pipeline of quality space, not weak tenant appetite, is now the constraint shaping leasing decisions. Sydney's CBD illustrates the point directly. JLL recorded vacancy falling to 13.9% in the second quarter of 2026, down from 14.6% at the end of 2025, with no new supply delivered in either quarter and 39,300 sqm of net absorption recorded year to date. Vacancy fell because tenants leased existing space faster than usual, not because a new building came online to soak it up.
Melbourne shows what a genuine supply glut looks like
Melbourne is the market where the supply side is unmistakable. JLL's data shows roughly 675,000 sqm of new office space completed in Melbourne's CBD between the first quarter of 2020 and the first quarter of 2026, equal to about 12.5% of the entire CBD's stock delivered inside six years, including two large towers, 7 Spencer Street and 51 Flinders Lane, both completed in 2026. That wall of new supply is the main reason Melbourne's CBD vacancy sat at 20.5% in the June quarter, among the highest of any Australian capital. But demand has also been catching up: net absorption over the twelve months to mid-2026 came in above 54,800 sqm, the strongest annual result since 2019, helped by some ageing buildings being withdrawn from the market altogether. Vacancy eased to 18.9% by July as a result. Melbourne's story is a supply glut still being worked through, not one that's been solved, but the trend shows a market absorbing an oversupply rather than losing tenants to it.
Parramatta shows the opposite: falling demand with barely any new supply to blame
Parramatta is the clearest counter-example, and the one regulators are now treating as structural rather than cyclical. The Property Council's data shows Parramatta's overall office vacancy rising from 20.0% in July 2025 to 22.1% in January 2026 and then to 23.5% in July 2026, the fourth consecutive reporting period above 20%. Unlike Melbourne, the driver isn't a wave of new towers: only 15,981 sqm of new supply was added in the latest half, a modest amount by CBD standards. Instead, net absorption over the same period was negative, at minus 2,323 sqm, meaning tenants handed back more space than anyone leased, even with almost nothing new competing for their attention. Ross Grove, the Property Council's Western Sydney regional director, described the result as more than ordinary market noise: "These are not the numbers of a market experiencing a temporary blip. They point to a structural challenge that policymakers need to confront." The Property Council's proposed fix is telling: rather than waiting for demand to return, it is pushing for planning settings that would let vacant office floorplates convert to build-to-rent housing, pointing to the newly opened 47-storey HOME Parramatta build-to-rent tower, which reportedly leased around 10% of its apartments within weeks of opening with minimal marketing, as evidence there is a ready alternative use if office demand doesn't come back.
The practical takeaway: don't treat national vacancy as one market
The practical implication cuts across owners, tenants and investors alike. Anyone chasing premium CBD space is competing for a shrinking pool of new supply, not a market full of empty desks, so rents and incentives in that tier are likely to keep firming while the current construction downturn persists. A landlord holding older stock in a fringe or secondary location faces the opposite problem: no realistic demand recovery is going to fill space that occupiers have structurally moved away from, particularly as hybrid work settles into how much floor space a given headcount actually needs. And a market like Parramatta shows that when a location's own demand is genuinely weak, the fix now being discussed isn't more leasing incentives, it's rezoning the asset out of office use altogether. The 16.1% national figure is real, but treating it as a single office market obscures more than it reveals.