Instead the telco giant, which in March said it had delayed the plans, will review its current lease and also explore alternative locations.

This could include upgrading its existing offices to match the fitout in 400 George Street, Sydney, which Telstra has deemed one of its best.

Leasing agents said the decision was a result of the change of chief executive, who is evaluating the property requirements.

One agent said that when it comes to its property portfolio, Telstra is very conservative and cost-conscious and likes to look at all alternatives before committing to any long-lasting actions.

The decision to seek out potential developers to consolidate all its Melbourne offices under one roof was made while David Thodey was chief executive.

Mr Thodey announced his retirement this year and has been replaced by Andy Penn.

"This decision follows a review of all proposals submitted through the expressions of interest process and a detailed assessment of office accommodation solutions available in the Melbourne market," Telstra said in a statement.

"As a result we are reviewing our current lease agreements as well as exploring alternative Melbourne CBD locations. This will include using our existing fitouts more efficiently."

Telstra went to the market a year ago with a tender proposal to develop a 90,000 square metre tower at the property it owns at 288 Exhibition Street. The telco already occupies part of the adjoining site at 282 Exhibition Street, which has a 17-storey communications tower, known as the Exchange.

If it went ahead, the new project would have been one of the largest single-tenant towers in the Melbourne office market and backed by the strength of a Telstra tenancy covenant.

Melbourne's CBD vacancy rate edged up slightly from 8.5 per cent to 9.1 per cent in the latest Property Council of Australia's Office Market Report, released in February. The next report is in early August.

BIS Shrapnel expects the Melbourne leasing market to remain highly competitive and leasing incentives to be maintained through 2015 at around current levels of 30 per cent rent-free equivalent in the prime market.

There are several sites in Melbourne that would welcome a large, single tenant, including re-signing at AMP Capital's 35 Collins Street, or the Queensland Investment Corporation's 80 Collins Street development.

Other sites earmarked for development that could be attractive for the telco include 180 Flinders Street, and 82, 477 and 447 Collins Street.

Lend Lease and the Grocon UBS global alliance were frontrunners to develop the site.