Commercial property market poised for growth in 2026.

Australia's commercial property market is showing signs of recovery after a challenging period, with tentative growth expected throughout 2025 and stronger performance anticipated in 2026. 

According to Knight Frank Chief Economist Ben Burston, the worst of the economic news is behind us, with the nascent recovery in commercial property markets largely due to gradual improvement in the macroeconomic outlook since mid-2024. "It started with the commencement of the rate-cutting cycle overseas, which buoyed sentiment," Mr Burston said.

"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."

The return to sizeable returns across commercial property sectors will not be uniform, with industrial and logistics properties leading the recovery while office markets are expected to lag behind.

JLL's latest report reveals the industrial property market is returning to growth as yields begin to compress for the first time since early 2024. National industrial capital value growth is projected to rebound to 8.7 per cent year-on-year over 2025, marking the strongest annual growth since Q3 2022. Annabel McFarlane, Head of Strategic Research at JLL Australia, said there was a significant shift in the market dynamics.

"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," Ms McFarlane said.  

The report highlighted geographic variations in the industrial sector, 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.

Retail property markets are showing mixed signals despite April's unexpectedly downbeat results. CBD retail locations have demonstrated strong recovery, with vacancy rates dropping from 11.6 to 10.0 per cent. JLL's Lee McLaughlin said there were regional variations in retail performance, with Sydney emerging as the standout performer.

"Sydney has emerged as the standout performer, boasting the lowest vacancy rate of 3.9 per cent across all asset sub-sectors," Mr McLaughlin said. “This represents a significant 1.3 percentage point decrease year-on-year.”

Despite positive signs in various sectors, economic headwinds remain. Australia's first-quarter economic growth missed estimates, with real GDP expansion at just 1.3 per cent. Natural disasters in 2025 have cost the economy $2.2 billion, while uncertainty from US tariff policies is expected to impact investment and employment.

Mr. Burston remains optimistic about the medium-term outlook. "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," he said.