The Property Council of Australia Office Market Report for the six months to January shows Australia's office market vacancy rate increased from 9.6 per cent to 11.7 per cent - its highest level since January 1997.

CBD vacancies increased from 9.2 per cent to 11.1 per cent, the highest level since January 2015. Non-CBD markets recorded a larger increase in vacancy, from 10.4 per cent to 13.4 per cent, the highest level since 1995.

Property Council chief executive Ken Morrison said while COVID-19 had reduced demand for office space, most of the increase in vacancy had related to new office buildings coming into the market.

"While it was not a surprise to see office vacancies increase in the middle of a pandemic, it is the new supply of office space that is responsible for three-quarters of this impact, not reduced tenant demand," Mr Morrison said in a statement on Thursday.

COVID-19 had reduced demand for office space as businesses downsized, but that had a much smaller influence on vacancy rates than the new supply of offices becoming available.

The biggest CBD office markets of Sydney and Melbourne were performing well before the onset of the economic downturn caused by the pandemic, he said.

While vacancy rates were the highest in years, there was still strong interest in commercial property, particularly for premium CBD stock.

"Despite talk of a flight from the CBD in response to COVID-19, non-CBD markets also saw notable increases in vacancy indicating that widespread health restrictions across all workplaces and the economic downturn caused by the pandemic were strong prevailing influences, rather than an aversion to CBD offices," he said.

Business and government had a critical role to play in supporting the return to office workplaces, he said.

Office vacancies are calculated on whether a lease is in place for office space, not whether the tenant's employees are occupying the space or working from home.

Australian Associated Press