Has Commercial Property in Australia Turned a Corner?

Over the past three to four years, Australia’s commercial property market has weathered an exceptionally challenging period, underperforming many other asset classes — most notably international equities, which have surged by nearly 90% over the past five years. A convergence of unforeseen global and domestic forces has created headwinds that few could have predicted.

The Perfect Storm: COVID-19 and Economic Uncertainty

The initial and perhaps most disruptive shock came with the COVID-19 pandemic. Lockdowns across the country forced businesses to adapt rapidly to remote and hybrid working models. As a result, the demand for traditional office space — particularly in central business districts — plummeted. Companies downsized their office footprints or subleased unused floors, driving up vacancy rates and putting downward pressure on rental yields.

Retail property was similarly impacted. The shift to online shopping accelerated dramatically, and foot traffic in key retail precincts collapsed. This placed enormous strain on landlords, many of whom were forced to renegotiate leases or face extended vacancies. Compounding these pressures was uncertainty about the survival of small businesses — a core tenant base in many retail locations.

In response to surging inflation in 2022 and 2023, the Reserve Bank of Australia rapidly increased interest rates, reversing its earlier guidance that rates would remain low for an extended period. This sharp rise in borrowing costs pushed rental yields higher, dragged down property valuations, and slowed transaction volumes across the sector.

A Brighter Outlook Ahead

Yet after several turbulent years, the tide may finally be turning. Many analysts believe the commercial property market in Australia reached its cyclical low in 2024. With interest rates stabilising, business confidence improving, and office vacancy rates beginning to normalise, the outlook for the next two to three years is increasingly optimistic.

Investor sentiment is showing signs of revival. Transactional activity, though still modest, is beginning to pick up, and large institutional investors are re-entering the domestic office market — a signal of returning confidence.

The Supply Constraint Advantage

One of the most important factors shaping the recovery is supply — or, more precisely, the lack of it. High construction costs, ongoing labour shortages, and tighter financing conditions have dramatically slowed the pipeline of new commercial developments. This constrained supply will help stabilise occupancy levels and drive rental growth, particularly in prime locations, as demand recovers.

Capital Growth on the Horizon

With interest rate cuts potentially on the horizon and a tightening supply environment, the conditions are aligning for capital growth to return to the commercial property sector. While property valuations are only updated periodically — meaning portfolio uplifts may take time to materialise — the medium-term outlook appears increasingly positive.

We remain confident that assets acquired during the downturn of the past two to three years will be pivotal to future portfolio performance. As always, we’ll continue to provide updates as new information becomes available and maintain our focus on long-term value creation.