In the six months to January 2017, the Property Council of Australia's Office Market Report, Sydney saw a rise in empty offices from 5.6 per cent to 6.2 per cent, which leasing agents are calling the Barangaroo effect, with all the new towers, while Melbourne dropped from 7 per cent to 6.4 per cent, due to new sites at Docklands being occupied.

But while the PCA called on more industries to head back to the Sydney CBD, leasing agents predicted that the telco and internet-related sectors and co-sharing office business, will take up any space left vacant by the traditional banking and finance sectors.

Residential conversions, such as along St Kilda Road in Melbourne and in North Sydney, helped the city fringe area vacancy rates to remain steady. Melbourne's Southbank defied the odds of new development with one of the lowest vacancy rates in the country of about 4 per cent.

Leasing agents and landlords said that as the vacancy levels start to decline over the coming year, rents will rise and tenants will feel the squeeze of finding new space.

In Sydney, rents are tipped to rise by about 10 per cent to well over $1200 per square metre for premium-grade properties and for Melbourne the rise is forecast at over 8 per cent.

Overall, the Australian CBD office vacancy rate remained steady over the six months to January 2017, falling from 11.0 per cent to 10.9 per cent, with the national vacancy rate masking a significant divergence in performance between the states.

Demand for office space grew over three and a half times the historical average in Melbourne and over five times the historical average in Brisbane; with Sydney, Canberra and Perth recording small declines in demand and other capital cities remaining flat.

The forecast tightening of space is supported by the recent employment data which showed that job numbers rose by 13,500 in December after rising by 37,100 in November, previously reported as a rise of 39,100 jobs. Full-time jobs rose by 9300 while part-time jobs rose by 4200. Economists had tipped a 10,000 increase in jobs.

Full-time employment lifted by 95,000 in the December quarter, said to be the best result since the September quarter 2010.

According to CommSec, job vacancies are holding near five-year highs, in addition anecdotal evidence suggests activity levels among the business sector is lifting.

"The strength in commodity prices is also a positive and should support an improvement in employment across the resource states in coming months. It is still early days, but the last three months are certainly more upbeat," CommSec's senior economist Savanth Sebastian said.

The chief executive of the Property Council of Australia, Ken Morrison, said "Australian CBD markets are due to have only 462,000 square metres of space due to come online over the next three years".

"This is just half the amount of new supply CBD markets have experienced over the last 18 months," Mr Morrison said.

"With supply such a minor part of the picture in coming years, demand will drive vacancy rates down across our CBDs. For cities like Sydney and Melbourne it is likely to mean pressures on rents, and in cities like Darwin and Perth which have extraordinarily high vacancy rates, it will mean a welcome reprieve for property owners."

AMP Capital managing director office and industrial, Luke Briscoe, said it is a unique time in the Australian office market, with no two markets performing in the same way.

"Sydney and Melbourne are both positioned well, with both markets expected to see significant reduction in incentives in the next 12-18 months owing to increased demand, stock withdrawals and limited supply," Mr Briscoe said.

"Brisbane and Perth continue to have some headwinds, albeit Brisbane now appears to be pushing past the trough, whilst we anticipate Perth will continue to remain highly competitive in the short term. Canberra and Adelaide sit between the extremes with heightened vacancy rates, but with a slow and steady level of demand."

CBRE's head of office leasing for Pacific, Andrew Tracey, said that businesses in both Melbourne and Sydney were growing again and the battle for talent was heating up.

"Overlaid against this is the roll-out of new technology, meaning that the workplace is changing and it's changing at a more rapid rate than ever before," Mr Tracey said.

"The battle for talent, particularly in the technology, media and telecom (TMT) sector, has seen the race for amenity and better working environments become red hot and this will be a key driver of tenant decision making in the future."

Sydney outlook

The PCA's NSW executive director, Jane Fitzgerald, said the drop in demand for Sydney indicates the need to boost economic growth and encourage big business to set up shop in our CBD if we are to cater for a growing population with the smart jobs of the future as well as remain internationally competitive.

"NSW had five of the top 10 markets with the lowest vacancy rates in Australia but we must not rest on our laurels – to continue to stay ahead of other Australian and overseas markets we need to concentrate on encouraging investment," Ms Fitzgerald said.

CBRE's senior director, advisory & transaction services – office, Jenine Cranston, said the Sydney market will continue to be acutely affected by a lack of stock. Sydney is now feeling the combined effect of stock withdrawals for office development, the Sydney Metro project and both residential and hotel conversions.

"CBD rental growth will continue in 2017, but we're not likely to see the heady heights of 20 per cent-plus in 2016. This year, our forecasts are more tempered at circa 10 per cent," Ms Cranston said.

"That said, we'll not be entirely surprised to see this shift northward if competition for good space hots up in a market with limited options."

JLL's head of office leasing NSW, Daniel Kernaghan, said tenant displacement due to office withdrawals will be a continuing theme over 2017.

"The increased competition for quality space will place upward pressure on rents, and we expect incentives to continue on their downward trajectory. Increased withdrawal activity combined with limited supply additions will result in the CBD contracting in size over the year," Mr Kernaghan said.

"Over 2016 we saw a number of organisations centralise to the CBD from smaller suburban office markets and we expect this trend to continue throughout the year. Drivers of centralisation revolve around access to public transport, availability of high-quality office space and a desire to effect organisational change through access to a different or larger talent pool."

Melbourne outlook

The head of office Leasing, Victoria, at Knight Frank, Hamish Sutherland, said the tidal wave of demand for CBD office space in Melbourne is leading to a real scenario of lack of suitable sites for the office developments of the future.

"Outside of the sites with development approvals in place, noting there is strong interest in Brookfield's 405 Bourke Street in the heart of the CBD, it is difficult to identify where the next skyscraper will be developed. In the past four years, the number of sites with approvals has fallen from 18 to seven," Mr Sutherland said.

"With Melbourne CBD total vacancy falling to its lowest level in three years, both prime and secondary office net effective rents increased solidly.

"Melbourne prime CBD office net effective rents have now hit all-time highs, with constrained supply coupled with continued tenant demand."

He said that between 2016 and 2020, gross supply added to the market will average 2.3 per cent of total stock per annum; well below the historical annual gross supply average of 3.5 per cent.

The director, advisory & transaction services – office for CBRE Melbourne, Marc Mengoni, said 2017 is poised to see a flurry of leasing activity across the Melbourne CBD as vacancy tightens significantly and tenants scramble to secure the last remaining major vacancies.

"Typically, the Melbourne market trends six months behind that of Sydney, and – following a successful 2016 in the Sydney CBD – we should see a strong year across the Melbourne market. Over the next 12-18 months, the CBD should see vacancy drop to levels not seen since right before the GFC when it hit a record low of 3.1 per cent," Mr Mengoni said.

Mr Briscoe said the Melbourne market continues to remain robust.

"With limited supply in the next three years, we anticipate the net incentive levels to drop from the high 20's and rest in the lower 20's before the year is out. Demand and recent moves by the large insurance firms, banks and government agencies has left limited large contiguous tranches of space available in 2018 and 2019, which will, coupled with steady demand, drive both net face and net effective rental growth," Mr Briscoe said.