Commercial property finds its footing as investors return

Australia’s commercial property market is showing clearer signs of recovery, with institutional investment surging, buyer sentiment improving and investors increasingly looking beyond residential property for stronger returns.

Buyers remain highly selective, favouring assets with strong fundamentals, reliable tenants and clear prospects for rental growth. But after the disruption of the previous interest rate cycle, the latest data suggests commercial property is moving into a more constructive phase.

Knight Frank Chief Economist Ben Burston said the Reserve Bank of Australia’s decision to leave interest rates unchanged signals that policymakers are prepared to wait and assess the impact of previous rate rises.

“The decision signals that the RBA is prepared to wait and see whether the hikes earlier in the year have done enough to curb inflation,” Mr Burston said.

While inflation has moderated and unemployment has edged higher, he noted that discretionary spending and wage growth remain resilient, meaning the economy still has pockets of considerable momentum.

For commercial property investors, however, the pause is providing some welcome breathing room.

“Property markets have adjusted to the rate hikes implemented to date, with office and industrial yields edging up in Melbourne, Adelaide and Perth,” Mr Burston said.

Importantly, he said the impact had been “far less disruptive” than during the larger hiking cycle of 2022-23.

Higher interest rates have pushed yields higher and placed pressure on asset values, but the commercial market has avoided the more severe repricing experienced during the previous cycle.

Mr Burston said investors were “not out of the woods just yet”, but could take encouragement from shifting expectations around interest rates.

“Investors will take heart from shifting market expectations that point to a lower probability of further rises, sensing that we are either close to or at the peak and starting to look ahead at the potential for rate cuts in 2027,” he said.

Investment activity points to returning confidence

The strongest evidence of improving sentiment is coming from transaction volumes.

JLL data shows investment in Australian commercial real estate surged 82 per cent year-on-year in the second quarter of 2026 to US$8.9 billion, the strongest second-quarter result since 2021.

First-half investment reached US$14.7 billion, up 68 per cent on the same period last year.

The Australian result was part of a broader recovery across Asia Pacific, where commercial property investment increased 38 per cent year-on-year to US$45.5 billion.

Australia’s performance was particularly notable because four large-scale portfolio transactions accounted for much of the quarterly result, signalling a renewed willingness among institutional investors to deploy significant amounts of capital.

Luke Billiau, JLL’s Head of Capital Markets, Australia & New Zealand, said the transactions represented a “material shift in institutional conviction”.

“This level of portfolio activity, which we haven't seen since 2021, highlights the sustained demand for high-quality industrial assets where occupier fundamentals and constrained supply pipelines are creating a compelling rental growth outlook,” Mr Billiau said.

The industrial sector was particularly active, attracting capital from A-REITs, unlisted trusts, developers and private investors.

Retail is also beginning to attract renewed attention, with REITs re-engaging and private investors targeting assets valued below $50 million.

Mr Billiau said the 82 per cent annual increase demonstrated the resilience of the Australian market despite global uncertainty.

“For the second half of the year, we anticipate this positive momentum will be sustained as both domestic and offshore capital continues to seek out opportunities at scale,” he said.

The improving investment environment is also being reflected at the individual asset level.

Colliers Head of New South Wales Investment Services James Cowan told API Magazine that buyer sentiment towards commercial property had improved as investors became increasingly attracted to the stronger net returns available compared with residential property.

“We’ve seen a positive shift in buyer sentiment towards commercial property with investors increasingly attracted to the stronger net returns available compared with residential property,” Mr Cowan said.

That is supporting greater enquiry and competition for well-positioned assets but the market remains distinctly two-tiered.

“There is strong competition for high-quality assets with good fundamentals while properties that are less well positioned or require more work are facing a more selective buyer pool,” Mr Cowan said.

“Despite the broader market headwinds, premium-quality real estate continues to trade as buyers remain focused on quality.”

That selectivity is also helping the market move towards greater liquidity.

“The gap between buyer and seller expectations is continuing to close,” Mr Cowan said.

“More vendors are now prepared to crystallise value at today’s market pricing, which is helping to unlock transactions and create greater liquidity in the market.”

Large format retail bucks the trend

One of the more resilient corners of the commercial market is large format retail (LFR), which continues to attract strong investor interest despite limited transaction volumes.

The sector accounts for roughly one-third of Australia's retail space and generates approximately $1 in every $4 spent at retail registers.

Julie Ryan, CEO, Ray White CSR, said LFR assets were currently outperforming several other commercial property categories.

“Yields and returns on LFR assets are currently outperforming standard enclosed shopping centres, industrial warehousing, and CBD office spaces,” Ms Ryan said.

She said the strength of the sector was closely linked to its tenant base, with Australian LFR retailers generally possessing strong balance sheets, consumer appeal and products that are relatively resilient to e-commerce disruption.

Supply, however, is still a major constraint.

Land and construction costs remain high, while lengthy approval processes and competing uses for development sites make new LFR projects increasingly difficult to deliver.

Harvey Norman Head of Leasing and Development Alex Capra said retailers were increasingly taking matters into their own hands.

“Historically, there may have been developers creating large format centres, but it’s just not feasible to do that now given increasing land and construction prices, competing uses over time and approval constraints,” Mr Capra said.

“Attempts to find existing, suitable buildings in growth corridors are near impossible.”

As a result, major retailers are increasingly acquiring land directly and assembling complementary retail precincts.

The sector is also becoming more flexible about store sizes, with retailers adapting footprints to suit available sites and local catchments.

Ms Ryan said right-sizing was occurring nationally, with retailers increasingly recognising that a smaller footprint could sometimes deliver comparable trading outcomes when the tenancy mix was carefully curated.

That focus on curation is extending beyond traditional retail. Fitness facilities, quick-service restaurants, wellness concepts and home and lifestyle offerings are increasingly being incorporated into LFR precincts to increase customer dwell time and create complementary destinations.

Looking ahead, the next phase of the market may be less about building from scratch and more about repositioning existing assets.

Investors and owners are expected to upgrade and re-tenant older but well-located centres, improving productivity and extracting additional value from established sites.

Mr Capra described the process as “giving them a birthday”, involving upgrades such as refreshed facades, landscaping and improved customer environments.

In metropolitan markets, the longer-term trend is towards mixed-use projects, with large format retail increasingly forming the podium beneath residential or build-to-rent developments.