Commercial property market recovery to strengthen in 2026.

The commercial property market recovery that began in 2025 is set to strengthen and broaden in 2026, according to Knight Frank's outlook report, Australian Horizon 2026. 

Knight Frank Chief Economist Ben Burston said the recovery has so far been selective across certain asset types and locations but is expected to widen this year. "As we predicted in last year's report, industrial asset values have been quickest to start the recovery, spurred by yield compression in Sydney and Brisbane," he said. "Capital values are up by 3.1% on average over the past year, with the strongest growth in Brisbane where asset values are up by 5.5%."

The retail sector has shown similar resilience, with average capital values increasing by 2.1% over the past 12 months, led by super and major regional centres and neighbourhood centres. Office markets have been slower to respond and have demonstrated greater divergence, but growth has now returned across all major CBDs, with Sydney, Brisbane, and Adelaide leading the way.

Burston expects the recovery to extend beyond core assets and locations in each sector. For industrial markets, Melbourne is predicted to join the recovery, while in retail, growth will likely pick up in sub-regional centres.

In office markets, continued growth is expected in Adelaide and Brisbane, while in Sydney and Melbourne, the recovery should extend beyond core precincts to adjacent markets like Midtown in Sydney and the Western Core in Melbourne. Knight Frank's report outlines seven key predictions for the commercial property market in 2026, providing guidance for investors as the market continues its recovery.

The first prediction suggests that while there is still time to buy as the recovery gathers pace, investors may need to look beyond core markets. With pricing moving off the bottom in favoured markets like Sydney CBD Core office, many owners are now less willing to trade given the anticipation of cyclical recovery.

Melbourne presents a compelling proposition for patient investors, according to the second prediction. Despite being slower to turn the corner, Melbourne offers strong long-term growth prospects, and with a larger downturn than other cities, downside risk is now limited.

The third prediction indicates a shift away from the 'beds & sheds' narrative that has dominated for nearly a decade. Office and retail assets now offer stronger income returns with increasingly positive rental growth prospects. "The 'beds & sheds' narrative has become a familiar refrain, but after nearly a decade, outperformance of these sectors has run its course and the outlook for the key sectors is on a much more equal footing," Burston said.

The fifth prediction suggests prime office rental growth will defy above-average vacancy rates. High-quality prime assets are achieving strong leasing outcomes despite overall vacancy remaining above 10% in many markets.

Industrial vacancy is predicted to stabilise before the next wave of growth. Construction in the industrial market is quickly adjusting to higher vacancy and higher economic rents, with a forecast of 1.8 million sqm across the East Coast in 2026, down from 2.6 million sqm in 2024.

The final prediction highlights dominant shopping centres as the pick of the bunch in retail. These centres are best positioned to take advantage due to their lack of immediate competition and greater mixed-use optionality.