Retail has positioned itself as one of the strongest performing sectors in the commercial property market, driven by strong population growth, rising real incomes, and limited new supply.

According to Knight Frank's latest Australian Retail Review, the sector is attracting increased capital from investors looking to capitalise on improving market fundamentals. Real household disposable income grew by 4.2% over the year to Q2 2025, the strongest growth since Q1 2021, while nominal retail sales increased by 5.1% over the year to July.

Knight Frank Senior Economist, Research & Consulting Alistair Read said multiple factors are contributing to the sector's strength. "While trading conditions remained tough in 2024-25, there are green shoots in the consumer environment and outlook for retail consumption," he said.

Retail property was the most traded asset class in the first half of 2025, with $6 billion transacted, outpacing both industrial ($5.6 billion) and office ($3.7 billion) sectors. Total investment volumes for retail property over H1 2025 increased 17% from the $5.1 billion traded in H1 2024, with NSW leading at $3 billion, followed by Queensland ($1 billion) and Victoria ($0.9 billion).

The report found capital values for retail property grew by 1.6% over the year to Q2 2025, marking the first annual growth since Q1 2023. This growth was driven by both falling interest rates and strengthening rental growth.

Knight Frank Partner, Head of Retail Investments Campbell Aitken said investor confidence in the sector is growing substantially. "The return to growth in leasing spreads, MAT and household spending combined with the limited supply of new retail stock, is persuading more investors that the sector's tailwinds are growing, with retail offering strong long-term growth potential as the economy recovers," Mr Aitken said.

The research identified a growing divergence between different retail classes, with strong capital growth persisting for large super/major regional assets and small neighbourhood assets, supported by population growth and consumer preferences for convenience.

Five key themes are shaping the retail sector's future outlook, including high demand for small assets under $300 million, a strong capital raising environment, complementary residential developments, shifting structures in major tenant leases, and reconfigurations as cost-effective alternatives to expansion.

The report noted that retail landlords are gaining negotiating power when major tenant leases approach expiry, pushing for structural changes in lease terms. Additionally, reconfiguring space vacated by department stores presents opportunities to enhance asset performance and unlock value.

"Many retailers pointed to a strong pick up in sales growth in the first few weeks of the 2025-26 financial year as an indication that improving consumer sentiment and incomes were beginning to translate into retail sales growth," Mr Read said.