Long term investors well placed for office upswing in Australia

Australian CBD office property capital values have taken a battering since mid-2022, falling by an average 18% for prime assets. In the process, capital values have fallen below replacement cost in many markets, which is constraining new commencements. Signs suggest office property is at or near the bottom of the cycle, which in a long run sense is time to position for the next upswing. Whilst there are some questions on the exact timing of the recovery, we forecast a market upswing coming through, which will gain momentum towards the end of the decade.

Economic weakness, a slow return to the office and global uncertainty in the wake of tariffs, means a recovery in occupier demand will be slow for most of FY2026 before picking up from FY2027. Supply will be constrained until capital values surpass replacement costs, which we don’t think will happen until around 2033.

Rising demand and falling supply (as some markets slip into negative net additions due to withdrawals), will eventually allow national office vacancy rates to decline from around 15% currently to less than 7% by 2032. This process will be slower in some markets (notably Canberra and Adelaide) than others as projects currently underway are absorbed. Falling vacancy rates will drive up rents over the next decade.

Chart 1: Capital values are close to the bottom of the cycle