Resurgent commercial property market offers myriad investor options

A commercial property resurgence is underway in Australia, driven by foreign investors, an office market recovery and industrial assets across NSW and Victoria.

A back-to-the-office theme has seen CBD office markets bolstered, with tight vacancy rates and rising rents prevalent in the city centres of Sydney, Melbourne, Brisbane and Perth.

The Property Council of Australia (PCA) office vacancy results released Thursday (6 February) revealed the national leasing market in Australia continues to show a strong preference for high-quality properties.

Tim Molchanoff, Cushman & Wakefield’s Head of Office Leasing, said tenants were seeking better locations and a range of amenities.

“This is driving significant demand for central core assets across our CBD markets, helping push rents higher, while the fringe and metro markets sit slightly behind.

“Supply pipelines vary by city, but one thing is evident: economic rents are above market rents across our markets, which will likely hamper the delivery of some proposed projects.

“This will further fuel rental growth across the country, in which we expect Sydney core and Brisbane to outperform the other markets.

“A tight labour market and an expanding white-collar workforce will fuel additional demand across most of our major markets,” he said.

As a whole, the commercial market has been defined by a clear segmentation across price points, with domestic private investors dominating the sub-$50 million segment, accounting for approximately three-quarters of transactions.

Vanessa Rader, Head of Research, Ray White Group, said acquisitions were predominantly focused on industrial assets across NSW and Victoria, with private investors particularly active in last-mile logistics facilities and smaller industrial units that offer strong tenant covenants.

“The mid-market segment ($50-100 million) witnessed increased offshore buyer activity as international investors sought to capitalise on favourable currency conditions.

“This price point saw a balanced distribution across sectors, with retail leading transaction volumes, followed by similar levels of investment across office, industrial, and development sites.

“NSW remained the preferred investment destination, followed by Victoria and Queensland, reflecting the continued focus on core markets with strong population growth and infrastructure investment.”

In a result that might displease the new US President who has been vocal about money flowing out of his country, United States investors dominated acquisition activity in 2024.

Capitalising on a weak Australian dollar, international buyers were drawn toward specialised industrial assets, including cold storage facilities and data centres, highlighting the evolution of foreign investment strategies and buyers increasingly focused on sectors benefiting from structural changes in the economy.

Japanese capital continued to strengthen its presence in Australian property markets, followed by steady investment flows from Singapore, Hong Kong, and Canada.

“These investors showed particular interest in the office sector, attracted by the correction in capitalisation rates and potential for value-add opportunities in prime assets, while also maintaining a strong appetite for industrial and retail investments that align with their long-term investment strategies,” Ms Rader said.

She added that Korean institutional investors have emerged as significant new players, particularly attracted to build-to-rent and student accommodation developments in major metropolitan markets.

“This surge in residential development funding comes at a crucial time, with these purpose-built rental projects positioned to help address Australia's housing supply challenges.”

CBD office markets on the rise

The January 2025 edition of the twice-yearly PCA Office Market Report showed Australia’s CBD office vacancy increased marginally from 13.6 to 13.7 per cent over the six months to January 2025, thanks to increased supply and despite positive demand in four capitals.

Prospects for the office market looked strong across the board.

Andrea Roberts, National Head of Leasing, Knight Frank, said that after a challenging middle of 2024, enquiry levels from November 2024 onwards have increased.

“Fit-out costs, construction costs and interest rate levels prove to be the headwinds to discourage tenant moves, with landlords prudently allocating capital due in the current economic environment.

Where good quality existing fit-outs are available, it is financially compelling to tenants to stay put or achieve a double deal, but only if the fit-out that is existing or inherited is of a sufficient high quality and has suitability to their business.

“The ‘best and the rest’ thematic continues to prevail, with a focus on high quality, well-located premises that have the best amenity for employees, if not on the doorstep, then immediately adjacent in the precinct.

“Buildings who have vacancy in these precincts within capital city markets will continue to outperform their competition where accessibility to critical amenity, especially transport, exists, and in Sydney, the opening of the Sydney Metro has elevated this even more so.”

Businesses on the move are also driving the Melbourne office market, according to Marc Mengoni, Cushman & Wakefield’s National Director, Office Leasing Victoria.

“Over the past 12 months we have seen strong demand from Metropolitan occupiers relocating their headquarters to Melbourne’s CBD and inner fringe locations as they seek to improve workplace access and drive cultural change for the next generation of employees.

“For the time being, market conditions are favourable for active tenants and most are discovering not only can they afford better quality offices, situated on major transport hubs, but in some cases actually reduce costs.”

New supply drives east coast vacancies

The five major cities saw a divergence in vacancy rates, with Adelaide and Perth seeing vacancy decreases, Melbourne remaining steady, and Sydney and Brisbane seeing increases commensurate with new supply.

Property Council Chief Executive Mike Zorbas said over 220,000sqm of new supply was added to our cities in the last six months, just below the historical average of over 237,000sqm.

“We have continued to see the supply of new office space above or near the historical average, providing access to a wealth of new, high-quality office space in our cities,” Mr Zorbas said.

“Vacancy levels continue to be driven by this large level of supply, as demand has remained positive.

“Over the last three and a half years, positive demand for office space in our CBDs has been recorded in five of the last seven reporting periods.

“Sydney, Perth, Adelaide and Canberra saw positive demand for office space above their historical averages in the last six months.

“High levels of supply show that businesses still call our CBDs home as they balance flexible working arrangements with face-to-face contact in the office.”

Sydney’s office vacancy rate increased from 11.6 to 12.8 per cent driven by 164,552sqm of new supply being added over the last six months, well above the historical average of 74,361sqm.

Melbourne’s vacancy rate remained stable at 18 per cent and Brisbane witnessed a rise from 9.5 to 10.2 per cent.

Perth’s vacancy decreased from 15.5 to 15.1 per cent while Adelaide’s dropped from 17.5 to 16.4 per cent.

Canberra’s office vacancy rates fell from 9.5 to 9.2 per cent. Hobart’s vacancy increased from 2.8 to 3.6 per cent – the lowest vacancy rate in the country. Darwin enjoyed the largest decrease in vacancy rates, falling from 14.4 to 11.9 per cent.

Mark McCann, Knight Frank Head of Office Leasing, Queensland, said he expected vacancy to remain below 10 per cent until the second half of 2025.

“While the quantum of net absorption is likely to reduce in the short term, it is forecast to remain positive and, combined with no supply and more stock unlikely to be delivered until 2028 or 2029, this will directly translate into further falls in the vacancy rate.”

He said CBD businesses planning for the latter part of the decade were contemplating their next moves now.

“While some tenants are staying put, major corporate occupiers with lease expiries from 2028 onwards who want to consider new development options will need to start looking now to ensure they are able to secure space, due to limited supply coming online.

“Demand for new stock within such a strongly growing CBD is likely to remain robust but new commercial developments are facing challenges in terms of financial feasibility due to ongoing high construction costs, extended development timeframes and modest take-out yield expectations,” Mr McCann said.

His Western Australian counterpart, Ian Edwards, said 2025 is shaping up to be a good year for Perth office leasing, where office occupancy remains the strongest in the country.

“Leasing activity in the Perth CBD remains at a healthy level, with new construction being taken up at economic rents.

“Capital constraints, including higher interest rates and increased construction costs, will result in a hiatus of new construction and this in turn will provide existing landlords some breathing space to lease their vacancy and renew leases.

“Strong economic activity and population growth is expected to underpin office demand while a lack of good quality large format vacancy in the suburbs has seen increased CBD demand from suburban tenants.”