Commercial Property Market Set to Rebound Through 2026

The recovery of Australia’s commercial property sector is expected to gather pace throughout 2025 and into 2026, according to new research released by Knight Frank.

The update to the firm’s Horizon 2025 outlook finds that the sector is “sequentially turning the corner back to growth,” with fundamentals for long-term expansion firmly in place.

While global risks, such as the impact of US-imposed tariffs, still linger, the report notes the worst may be behind the market.

Knight Frank Chief Economist Ben Burston said: “In this respect, property is better placed than other asset classes to withstand the trade war,” adding that volatility in equity and fixed income markets has made property a more attractive option once again.

Following a period of disruption, retail and industrial asset values were the first to recover, with all segments and cities returning to growth by late 2024.

“Office values have also now turned positive in Q1, off the back of improving prospects for core CBD assets despite pockets of over-supply elsewhere,” Burston said.

The report also points to increasing liquidity, with large-scale acquisitions becoming more common and investor confidence returning amid expectations of further interest rate cuts.

“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,” said Burston.

Industrial and logistics assets are leading the charge, with competition intensifying for prime properties in Brisbane and Sydney.

Meanwhile, the living sectors continue to gain ground, with nearly 16,000 new student accommodation and build-to-rent units under construction and more than 20,000 approved for future development.

With asset values now well below replacement cost and market rents lagging, Knight Frank reports a growing pool of investors positioning themselves in core markets to take advantage of cyclical recovery and medium-term rental growth.

Australia’s major CBD office markets are recording some of their strongest rental growth since the pandemic, with businesses increasingly prioritising premium office space despite elevated geopolitical and economic uncertainty.

Knight Frank’s Australian Office Indicators Q1 2026 report found net effective rents in Sydney and Melbourne CBDs rose at their fastest annual pace since COVID-19, increasing 10.2 per cent and 6.8 per cent respectively over the 12 months to March.

Brisbane posted the strongest growth nationally, with net effective rents climbing 11.7 per cent over the same period.

The report points to a widening divide between prime CBD office towers and secondary office stock, as occupiers increasingly focus on quality, location and workplace amenity when making leasing decisions.

Knight Frank Senior Economist, Research & Consulting Alistair Read said demand remained heavily concentrated in premium assets within core CBD precincts, helping drive stronger rental growth in top-tier buildings.

“Occupier demand continues to be heavily concentrated in the most desirable CBD precincts and the highest-quality buildings, accelerating a sharp divergence between core and non-core markets,” Mr Read said.

According to the report, Sydney’s Core precinct and Melbourne’s Eastern Core significantly outperformed broader CBD markets over the past year.

“In Sydney’s Core precinct and Melbourne’s Eastern Core, net effective rents surged 14.3% and 16.1% over the past year, significantly outperforming the rest-of-CBD precincts,” Mr Read said.

The rental gap between prime and non-prime office locations has also continued to widen sharply.

“As a result, core CBD rents are now 54% higher than non-core locations in Sydney and 93% higher in Melbourne, highlighting the growing premium placed on amenity, accessibility and workplace quality,” he said.

Knight Frank said the strong rental growth across the major CBDs was being underpinned by a limited supply pipeline, with few new office developments expected to be delivered in the near term.

Mr Read said subdued construction activity was likely to support ongoing rental growth and tighter vacancy rates over the medium term, particularly for premium office towers.

“The combination of sustained demand and declining levels of new development will aid ongoing prime rental growth and lower vacancy rates over the medium term, particularly for best-in-class assets,” he said.

The report noted that current economic conditions were making new office developments increasingly difficult to justify financially.

“Economic rents remain well above expected market rents, making the construction of new office towers largely unviable, and concentrating tenant demand into existing buildings,” Mr Read said.

While suburban office markets generally remained subdued compared with CBDs, Melbourne’s Southbank precinct was identified as a relative outperformer, recording annual net effective rental growth of 2.7 per cent.

The report comes as broader Asia-Pacific office markets continue to stabilise following several years of disruption linked to hybrid work trends, inflation and rising interest rates.

Knight Frank’s separate Asia-Pacific Q1 2026 Office Highlights report found Sydney and Brisbane were among the strongest-performing office rental markets in the region, behind only Bengaluru and Tokyo for annual prime net face rental growth.

The Asia-Pacific report also found 18 of the 24 cities monitored across the region recorded stable or increasing rents in the first quarter of 2026, even as geopolitical uncertainty intensified following escalating conflict in the Middle East.

Commercial Property Market Set to Rebound Through 2026

Knight Frank’s latest Horizon 2025 update signals renewed confidence in Australian commercial real estate, with signs of recovery accelerating across cities and sectors.

Office rents in Sydney, Melbourne and Brisbane are climbing at their fastest pace since the pandemic as tenants compete for premium CBD space amid tightening supply.