Australian commercial property market named world leader but investor challenges remain
Australia's commercial property market has been declared the most resilient in the Asia Pacific region, with four critical areas seen as crucial for investors to assess.
The commercial real estate (CRE) market in the Asia Pacific region is gradually rebounding from recent economic, geopolitical, and supply chain disruptions, though recovery varies between countries.
According to Oxford Economics’ Commercial Real Estate Megatrend Resilience Index, Australia stands out as the most resilient market, leading two of four resilience indicators and posting robust performance across the residential, industrial, commercial, and hotel sectors.
The index evaluates countries across four critical megatrends—demographics, technology, geopolitics, and climate—which when aggregated influence the all-property score across five sectors: office, retail, industrial, residential, and hotel.
Analysing the relationships between these megatrends and sector scores is essential for investors looking to identify the safest and most promising investment opportunities.
With that said, we’ll dive into Australia’s position across these four megatrends to examine opportunities that exist, and detail key challenges that could emerge and impact the country’s promising commercial real estate market.
Strengths in demographics and geopolitics
Australia’s strong performance in the demographics megatrend is driven by a strong economy, high quality of life, and steady skilled migration inflows, alongside a birth rate that remains robust among advanced economies.
Altogether, these long-term demographic factors position the country for the highest projected population growth among the 25 nations analysed in the Index.
Australia also has a median population age of 39 years, which indicates an ageing but nonetheless productive and experienced workforce.
On the geopolitics front, Australia leads its APAC neighbours by a wide margin, excelling in economic output, security posture and global relations.
Its diversified economy, stable governance and influence within the APAC region make it an attractive and relatively low-risk destination for foreign investment.
This geopolitical stability further strengthens its appeal for capital inflows into the commercial real estate market.
Implications for commercial resilience
Australia’s residential sector shows great resilience, driven by skilled migration and a growing working-age population.
In turn, this has fuelled strong residential demand across major rental markets like Perth, Melbourne, and Sydney, but the ongoing nationwide housing shortage has pushed federal and state governments to enact property restrictions or increase housing supply in the near future – placing a shroud of uncertainty on commercial investment.
Demand in Australia’s office sector also shows encouraging signs of strength.
With one of the region’s youngest workforces, Australia is among seven countries in the study with a notably young working-age demographic.
Vacancy rates in CBDs have been falling since the start of the year, tightening supply and fuelling demand for new office spaces in line with Australia’s sustained economic growth.
Australia’s industrial and retail sectors are gaining momentum from the country’s population boom, which expands the domestic consumer base and labour pool, creating opportunities for key players in both sectors.
Australia’s emerging technology infrastructure also drives innovation and productivity across the industrial and hotel sectors. In the industrial sector, this results in rapid digitisation and automation that enhances operational efficiency.
For hotels, a robust digital infrastructure and amenities are essential to cater to the expectations of modern tourists.
Rising tide of climate risk
The only megatrend in which Australia lagged was climate readiness, scoring lower than APAC neighbours like Singapore, Japan, and China.
This is largely due to challenges in decarbonising hard-to-abate industries such as agriculture, steelmaking and mining, which together account for 20 per cent of Australia’s annual greenhouse gas emissions.
The economic importance of these industries and the long timelines required to transition these sectors pose financial and climate-related risks to future investments in Australia’s commercial property market.
Furthermore, Australia has made limited progress on the United Nations’ 17 Sustainable Development Goals (SDGs).
Nearly half of the targets show only minimal to moderate advancement, while about a third are stalled or regressing. That’s not a good look for a country that has much to lose to climate change, raising concerns about Australia's capacity to sustain economic growth, energy security, and resilient infrastructure, which includes the development of affordable, energy-efficient housing.
If we don’t do something about climate readiness and we do get the expected temperature increase it could have an impact on the energy efficiency of properties and therefore risk a downgrade in the valuation of the asset.
Higher borrowing costs
Investors in Australian commercial real estate may face higher borrowing costs due to elevated climate transition risk premiums, which can impact the profitability and viability of long-term projects. To navigate these risks, investors are encouraged to assess how companies manage sustainability risks and opportunities through an Environmental, Social, and Governance (ESG) lens.
This approach provides insight into how effectively companies address the environmental and social impacts of their projects on Australia’s climate resilience.
Australian developers and property firms can ensure the country’s CRE sectors remain attractive and viable to investors by moving impact reporting with data on both ESG scores and SDG outcomes.
Providing these metrics boosts investor confidence by enabling them to assess long-term profitability through indicators like energy savings, climate readiness, and affordability.
Achieving this level of transparency will require investment in advanced data analytics tools and access to reliable impact metrics—an essential step to maintain Australia’s attractiveness and success in commercial real estate.
