As we enter 2025, the commercial property market shows promising signs of recovery, though market conditions remain mixed across different sectors and locations. The anticipated easing of interest rates could provide the catalyst many investors have been waiting for, potentially narrowing the currently tight yield spreads that sit between 50-150 basis points above cash rates.

Transaction momentum is building, particularly evident in the sub-$20 million market where both investors and owner-occupiers remain active. While larger institutional transactions have started to improve we are expecting to see more activity this year and early signs suggest offshore capital is regaining its appetite for Australian assets. The Australian dollar trading below USD 0.70 creates an attractive entry point for international investors, effectively offering a significant discount on asset prices compared to other gateway cities globally. This currency advantage, coupled with attractive yields, is drawing particular interest in specialised industrial and retail sectors not to mention trophy office offerings.

The office sector continues its structural transformation with most CBD vacancies ranging above 10 per cent. However, this challenge is not just having staff back in the office, but driving innovation in the sector. Premium grade assets offering strong environmental credentials, smart building technology, and enhanced amenities are attracting stronger tenant interest. Secondary assets face a crucial decision point between significant sustainability upgrades or exploring alternative uses, as corporate occupiers increasingly prioritise buildings that align with their ESG commitments. Despite this, affordability concerns will come into play for many occupiers particularly when incentive levels start to moderate.

A two-speed market is emerging in the industrial property sector. While headline vacancies remain low, growing incentives signal some cooling in traditional warehousing. However, specialised assets continue to outperform – cold storage facilities maintain tight yields, self-storage benefits from housing trends, and data centres (industrial’s great alternative) attract premium investment, particularly driven by AI and technology advancement.

The retail sector demonstrates unexpected resilience, particularly in prime locations. CBD retail cores are showing remarkable strength, with luxury retail expanding beyond traditional strongholds. Centres that successfully blend convenience-based retail, essential services, and entertainment offerings are outperforming, as consumers seek experiences alongside traditional shopping.

Traditional ‘alternative’ assets such as childcare centres, service stations and medical facilities will remain attractive to cash flow-focused investors, though success remains highly location-dependent. While these assets faced transaction headwinds in 2024 due to financing costs, improved lending conditions could reinvigorate activity, particularly given their accessible price points for private investors

Population growth continues to underpin market fundamentals, particularly evident in Queensland which maintains the bulk of regional investment activity. This demographic driver, combined with limited new supply across most sectors, should support occupancy levels through 2025.

While challenges remain, particularly around debt costs and yield spreads, several indicators suggest improving conditions for commercial property investment. Success will likely favour assets with strong fundamentals, clear value-add potential, and alignment with demographic trends. The key will be identifying opportunities in this evolving market while maintaining realistic return expectations as we move through 2025.

Vanessa Rader – Head of Research

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