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Melbourne’s commercial market set to boom as residential sector bounces back
New data showed that Melbourne has not only emerged as an attractive choice for residential properties, but remains a standout for retail, office, and build-to-rent investments.
Knight Frank Australia’s This is Melbourne report showed that a combination of factors, including a strong population, infrastructure investment, and liveability, was leading to a commercial boom.
Knight Frank Australia managing director – Victoria, Dominic Long, said Melbourne continued to stand out as one of Australia’s most compelling real estate markets, with its rapid population growth a key driver of demand.
“It will become Australia’s largest city by the 2030s, when its population is set to overtake Sydney,” Long said.
Knight Frank Australia head of research and consulting – Victoria, and the report’s author, Dr Tony McGough, said the attractiveness was not only shaped by population growth but also by Melbourne’s resilient economy and commitment to infrastructure investment.
“Melbourne is Australia’s most economically diverse city, and it has had stable growth over the past 25 years,” he said.
“The city has a highly educated workforce, with more than 43 per cent of Victorians aged 20 to 64 holding a bachelor's degree, and it is Australia’s education capital, home to 466,000-plus higher-education students.”
Office market continues to grow
According to the report, Melbourne’s CBD has grown the most of any CBD office market in Australia over the last 25 years, rising 65 per cent, while it also has the highest concentration of prime stock.
“For investors looking for value and growth, the city’s office market offers very attractive expected total returns,” Long said.
When it came to rental growth, prime net effective rents rose 4.0 per cent in 2025, their highest annual increase since 2019, when they rose 9.5 per cent.
Knight Frank said growth was realised across all premium assets in the basket, with the exception of a few A-grade assets in less favourable locations.
“This movement provides a signal that demand has lifted across the market, particularly for quality stock, and will continue to rise as the economic recovery continues, adding to Melbourne’s attractiveness.”
Additionally, the data showed that the spread in yields between prime Melbourne and Sydney CBD office assets was near peak levels.
The report said that the yield spread between prime CBD office assets in the two cities has widened to 101 basis points, the largest spread since Q4 2003.
“This discrepancy presents prospective investors with a compelling total-return opportunities, underpinned by the potential for both yield compression and rental growth,” the report said.
Confidence in retail market surges
According to Long, the retail market has been experiencing a resurgence as confidence has bounced back, leading to a 6.5 per cent vacancy rate.
As foot traffic has increased during evenings and weekends, data showed strong take-up of shopfronts across the CBD and the broader City of Melbourne.
“The uplift in demand has supported the delivery of new, high-quality retail precincts such as Melbourne Place and Melbourne Walk,” Knight Frank said.
“Alongside upgrades to established flagship destinations, including Bourke Street Mall, Emporium and the Queen Victoria Market.”
Knight Frank Australia director of retail leasing – Victoria, Michael Carlo, said that the city was seeing major national and international retailers commit to its core retail grid, underscoring long-term confidence in the CBD.
“Collectively, these developments reflect a clear trend toward larger, flagship-style stores and experience-driven retail, positioning Melbourne’s CBD for continued recovery and growth beyond 2025,” he said.
City maintains build-to-rent lead
In the build-to-rent (BTR) space, the data found that Melbourne had the most stock of any city in Australia, putting it well placed to continue growing in the future.
The report said that Melbourne accounted for more than half of Australia’s total BTR units and remained the preferred market for developers nationally.
Additionally, as BTR was supported by Victorian Government tax concessions, a tight residential rental market with a 1.5 per cent vacancy rate, and comparatively lower construction and land costs than in Sydney and Brisbane.
“Collectively, these factors position Melbourne to maintain its leadership as Australia’s dominant BTR market,” the report concluded.