And as more buildings go under the wrecking ball, tenants are willing to pay over the odds for short-term space, while they look for suitable, longer term options.

According to Knight Frank's latest research report Sydney CBD Office Market Overview: September 2016, the Sydney CBD is entering a period of unprecedented stock withdrawals, with 539,099 square metres earmarked for permanent withdrawal over the next four years.

The stock withdrawal has been triggered by the Sydney Metro construction, residential conversion and re-development. In the first half of 2016, 110,731 square metres were withdrawn from the market, more than half of which was withdrawn permanently.

Knight Frank's head of office agency, John Preece, said the overall vacancy rate in the CBD was expected to trend down towards 3.5 per cent by the end of 2018.

"Vacancies in the secondary market are forecast to decline at a faster pace than the prime market due to stock withdrawals. This will lead to some secondary tenants moving to the prime market or out of the CBD," Mr Preece said.

Knight Frank senior research manager, Alex Pham, said absorption is particularly strong in the prime market with an annual take-up of 192,198 square metres as at July 2016.

"This is the strongest level of absorption in the last decade and a reflection of the upgrading that is occurring and strengthening demand for prime space in the CBD," Mr Pham said.

According to JLL, as demand for office space in Sydney's CBD market rises and vacancy tightens, an increasing number of businesses are leasing space on short-term contracts, even in buildings set to be withdrawn and redeveloped in the medium term.

According to JLL, more than 20,000 square metres of space has been leased in the last 11 months in three CBD buildings located at 233 and 241 Castlereagh Street and 338 Pitt Street. The properties are, at this stage, set to be converted by owner Han's Group to high-rise residential in the medium term.

At present, 27 tenants have leased space in the buildings, hailing from sectors including education, online retailing and insurance. Online retailer The Iconic leased three and a half floors in 338 Pitt Street, totalling approximately 3400 sqm. Insurance provider Allianz has leased more than 800 sqm in 233 Castlereagh Street, while a number of education providers have also leased space across the assets.

JLL's manager of office leasing, Will Hamilton, said as vacancy continues to tighten, and there is an increase in businesses outgrowing serviced offices and co-working spaces, a number of companies are taking advantage of short-term cost-effective solutions.

"We have seen tenants utilise shorter term leases to set up new businesses and capitalise on opportunities, which would normally attract higher financials if it were not for term restriction.

"In addition, we have seen a number of groups who are in other locations securing expansion space in the CBD. This improves their access to city-based clients and opens doors to new business prospects, who might not have been able to seek out their services before, particularly for education providers."