Understanding the Growing Gap Between Economic Rent and Market Rent in Australia
Australia’s office development pipeline is under increasing pressure as elevated construction costs continue to outpace achievable market rents across major CBD markets. This divergence is reshaping development feasibility, constraining new supply, and influencing investment and leasing decisions nationwide.
The Cost to Build Office report examines the widening gap between economic rent and market rent, and what it means for the future of Australia’s commercial office sector.
Economic rent represents the rental level required to make a new office development viable once construction, land acquisition and financing costs are fully accounted for. In many markets, economic rents now sit above current market rents, limiting the feasibility of new developments despite ongoing demand for high‑quality workspace.
KEY MARKET INSIGHTS
While office rental growth is expected to continue across Australia’s CBDs, it has yet to fully offset higher delivery costs, keeping development activity constrained in the near term. This dynamic is resulting in:
- Disciplined new supply pipelines, particularly for premium-grade offices
- Continued support for prime rents, underpinned by limited new stock
- A growing shift toward refurbishment, repositioning and reinvestment as more cost‑effective pathways to deliver quality office space
Market conditions remain uneven. Sydney and Melbourne are showing early signs of improvement as rents begin to converge with economic thresholds, while Brisbane, Perth and Adelaide are expected to take longer to reach alignment.
