Commercial property tipped to strengthen in 2026 but economic obstacles remain

Commercial property has been on shaky ground for a year or more but the worst appears to be in the rear view mirror and tentative growth expected throughout 2025 and into next year.

Despite the relatively upbeat projections, there’s definitely no shortage of cautionary economic indicators.

Australia’s first-quarter economic growth missed estimates, with real GDP expansion coming in at just 1.3 per cent. Growth of just 0.2 per cent in the first three months to March compared with 0.6 per cent in the previous quarter.

Australian retail sales slipped unexpectedly in April despite lower borrowing costs and a cooling in inflation.

Natural disasters have in 2025 have cost the economy $2.2 billion.

The Reserve Bank of Australia has said the heightened uncertainty brought about by on-and-off again US tariff policies was expected to lead to declines in investment, output and employment in Australia.

Throw in a cost of living crisis and falling living standards, and what is it that will lure commercial property into greener pastures?

Well, according to Ben Burston, Knight Frank Chief Economist, the worst of the economic news is behind us and anything in front has already been priced into market expectations.

The nascent recovery in the commercial property market had been due in large part to the gradual improvement in the macroeconomic outlook since the middle of 2024, despite some ongoing risks impacting sentiment, he said.

“It started with the commencement of the rate cutting cycle overseas, which buoyed sentiment.

“Australia has been late to the party, with inflationary pressure more persistent than in other major economies during 2024, but sequential quarterly data releases in January and April have been reassuring and the RBA has now cut rates twice.

“Tariffs imposed by the US earlier this year came as a shock and have led to volatility in equity markets and uncertainty for property investors, and will likely impact economic growth, however, the heightened risk of a slowdown has now led to the expectation that three will be two or three more rate cuts by the end of the year, which will take the cash rate close to 3 per cent.

“Commercial property markets will respond to the rate cutting cycle, and the shift in the outlook raises the prospect of yield compression in the second half of the year, starting in the most favoured core markets,” Mr Burston said.

The commercial property return to sizeable returns would not be uniform.

Demand for prime industrial and logistics property is resurgent, with competition ramping up for high quality assets in Sydney and Brisbane.

“Yields are already starting to edge down in Brisbane, and it is expected yields will sharpen in Sydney in coming months,” Mr Burston said.

“Office markets will be slower to pick up and performance will continue to vary by asset, location and grade, however, the development pipeline is quickly thinning out, with asset values well below replacement cost and current market rents well below the level required to trigger new development.

“Consequently, a growing pool of investors are seeking to deploy capital in core markets to position themselves for cyclical recovery and growing rents over the medium term.”

A report released Friday (6 June) by JLL revealed a significant shift in the Australian industrial property landscape, with the market returning to growth as yields begin to compress for the first time since early 2024.

National industrial capital value growth is expected to rebound to 8.7 per cent year-on-year over 2025, the strongest annual growth since Q3 2022.

“A quicker than anticipated increase in capital allocations towards industrial assets in early 2025 has marked the recommencement of a tightening cycle in yields within the sector,” said Annabel McFarlane, Head of Strategic Research at JLL Australia.

“With global volatility impacting trade and consumer confidence, industrial real estate is increasingly being viewed as a low-risk hedge against equity market and currency fluctuations, which is broadening the investor pool and supporting asset pricing.”

JLL’s latest Australia Industrial National Overview and Outlook report highlighted stark geographic variations, with Melbourne accounting for 64.3 per cent of quarterly supply while Sydney recorded just 43,238 sqm – its lowest quarterly completion figure since 2015. This contrast underscores the varying market conditions across Australia's industrial hubs. 

National prime average weighted net face rents increased by 2.6 per cent quarter-on-quarter to $209 per sqm p.a. in Q1 2025, rebounding from slower growth in previous quarters. However, annual growth slowed to 7.6 per cent, the lowest rate since Q4 2021. 

“While rental growth has moderated from the robust levels we've seen in recent times, average prime net face rents continue to trend upwards,” Ms McFarlane noted.

“We’re seeing particularly strong rental performance in Adelaide and Perth due to acute supply-demand imbalances, with certain precincts recording double-digit annual growth.”

Retail facing challenges

Retail’s surprisingly downbeat April results put a bit of a shiver through the market after 12 months of positive signs of a retail rebound and a return of worker populations to CBDs around the country.

Retail vacancy levels in the major CBDs, which had been very high in recent years, are now reducing. Hospitality, food and beverage and entertainment operators made up the largest proportion of new tenants over the past 12 months.

Vanessa Hoey, Director, Herron Todd White, said that while interest rate cuts had improved retail sentiment, further cuts would be needed to significantly improve investor and consumer confidence.

“Reduced retail spending in addition to rising costs such as wages and energy put pressure on retailer affordability of rents and other outgoings.

“In many areas in Australia, leasing conditions remain challenging and there will continue to be downward pressure on rents for some retail tenancies.

“There are some positive signs, with increased leasing activity levels evident in many retail precincts with landlords and tenants more willing to negotiate to achieve mutually agreeable outcomes.”

Also of note is an ongoing trend in the retail property sector of increasing mixed use development.

“Many retail landlords are seeking to redevelop or expand their properties to include the addition of other uses such as medical, child care, office and residential, particularly for those on large sites well-located next to transport hubs,” Ms Hoey said.

Retail has its greenshoots.

In Perth, retail was the top performing sector for price growth in the Perth commercial market in the year to March 2025, according to the latest data available from REIWA.

The annual median sale price per sqm for the Perth retail market was $5,238 at the end of March, a 23.8 per cent increase over the year and 6.3 per cent higher than the 12 months to December 2024.

“Our members are seeing a broad range of investors, with many turning to retail due to rising prices and reduced yields in the industrial market,” she said.

“There has also been increased enquiry from Eastern States groups, who are comparing our yields and pricing to Sydney and Melbourne and seeing value.

“While investor sentiment has improved, they remain cautious and are focused on properties with strong tenancies in place.”

REIWA President, Suzanne Brown, said WA’s strong population growth was also supporting demand in the retail market.

“Population growth creates more customers for existing businesses and it also brings in people wanting to establish their own businesses,” she said.

“This leads to demand for retail properties and, combined with investor interest, is creating momentum in suburban and lifestyle precincts.”

Across Perth, 28.7 per cent of all retail sales were priced between $250,000-$500,000.

CBD vacancy rates fell by 1.6 percentage points (pps), the largest decrease across all retail formats, according to JLL.

Neighbourhood centre vacancy rates reduced from 5.9 to 4.9 per cent, regional shopping centres improved with vacancy rates dropping by 0.8 pps to 1.7 per cent, and sub-regional centres also saw improvement, with vacancy rates declining by 0.6 pps to 4.2 per cent.

Lee McLaughlin, JLL Head of Retail Leasing and Tenant Representation, Property and Asset Management on insight into regional variations, said, “Sydney has emerged as the standout performer, boasting the lowest vacancy rate of 3.9 per cent across all asset sub-sectors. This represents a significant 1.3 percentage point decrease year-on-year.”

“Melbourne and Adelaide also showed positive trends. Melbourne’s vacancy rate decreased by 0.8 percentage points to 4.1 per cent, while Adelaide saw a 0.7 percentage point drop to 5.1 per cent.”