Net effective rents rose 12.2% in Sydney CBD and 9.2% in Brisbane CBD over the 12 months to June 2026, according to Knight Frank’s Australian Office Indicators Q2 2026 report.
Adelaide CBD recorded 4.6% growth and Melbourne CBD 4.3%, with annual net effective rental growth now above the 10-year average in every major CBD market except Perth.
But higher rents have yet to trigger a new wave of construction.
We spoke to Knight Frank Senior Economist, Research & Consulting Alistair Read about what is holding back development, and what it means for tenants, landlords and developers.
Demand Spreads Beyond Core
Occupier demand is strengthening across the major CBD markets and spreading into neighbouring precincts.
National CBD net absorption reached 101,522sq m in the 12 months to July 2026, with every CBD except Canberra recording positive absorption.
Premium and A-grade buildings remain the focus, but tenants are increasingly looking beyond traditional core locations.
In Sydney, absorption has spread into the Western Corridor and Midtown, while Melbourne has seen demand broaden into the Civic and North Eastern precincts.
Mr Read said relative value was helping drive the shift.
“Net effective rents in Sydney CBD’s core and Melbourne’s East have risen by 14.8% and 9.7% respectively over the past year,” he said.
“This has made neighbouring precincts such as Sydney's Western Corridor or Melbourne's Civic, which offer comparable amenity and building quality at a materially lower cost, increasingly attractive.”
Supply Squeeze Shifts the Balance
With limited new space coming through, competition for premium and A-grade buildings is intensifying, creating a favourable backdrop for landlords.
“With CBD completions forecast to average around 160,000sq m a year over the next five years - over 60% below the 10-year average - vacancy risk is subsiding, and landlords are
increasingly able to pare incentives back,” Mr Read said.
“In the strongest rental growth markets this also changes when space is brought to market, with landlords able to hold space back rather than commit early at today’s rents.”
The same shortage is forcing occupiers to make leasing decisions sooner.
“With few new completions and no new buildings starting construction, tenants needing that space towards the end of the decade need to be in the market now to secure their desired space,” Mr Read said.
“Waiting has also become more expensive: with rents rising and incentives beginning to fall in some cities, deferring leasing decisions now carries a price as well as the risk of a thin option set at expiry.”
Development Still Not Viable
For developers, however, rising rents have not yet closed the feasibility gap.
In many markets, economic rents remain well above what tenants are actually willing to pay, leaving new developments struggling to get off the ground.
“Closing the gap in feasibility will require a combination of yield compression, which the longer-term rate trajectory points towards around late 2027 into 2028; a stabilisation in construction costs, which have risen sharply since the Middle East conflict; and continued strong rent growth,” Mr Read said.
“Our modelling indicates a 10% rise in construction costs for a new premium tower lifts the required economic rent by around 5%. With three to four years from commitment to completion, that means little new supply before the turn of the decade even on a favourable run of events.”
View the Report here >> https://content.knightfrank.com/research/2910/documents/en/australian-office-indicators-q2-2026-12987.pdf
