Commercial property deals jumped 21% in the first half of 2026, but as rates keep rising, buyers are becoming more careful with their capital. Experts say debt, asset quality and household spending will decide which sectors bear fruit.
The first half jump, as noted by MSCI Real Capital Analytics data, came amid three rate hikes in February, March and May. But after two more rate hikes so far in the second half, investors are watching which sectors are most exposed.
The cash rate is now 4.85%, its highest since 2008, with 125 basis points’ worth of tightening in 2026, comfortably unwinding last year’s three rate cuts. The RBA expects inflation to stay above 3% until the end of 2027, so more rises remain possible and cuts look a long way off.
The next tests come soon, with October’s inflation figures due on 25 November and the RBA’s next decision on 8 December.
Boom versus sentiment
Commercial property has enjoyed a strong run, but 2026 is looking like a year of two halves.
Higher borrowing costs are weighing on buyer demand, putting upward pressure on yields. NAB’s commercial property index fell 15 points to +1 in the September quarter, with respondents reporting tougher access to funding.
The May budget’s tax changes were expected to push residential investors towards commercial property, but so far there’s little sign of that among smaller private buyers, who remain more sensitive to rate increases.
Changes to SMSF lending and negative gearing in residential created strong interest in commercial property, but so far that has not materialised in capital reallocation. Picture: Getty
Ray White Group head of research Vanessa Rader said investment in deals under $2.5 million fell 29.9% in the September quarter to $1.525 billion.
“For investors in this price bracket, finance determines timing and with the cash rate at its highest level since 2008 and inflation moving further from target, the urgency that drove activity in late 2025 has well and truly gone,” she said.
Still, tight supply and rental growth is helping to protect returns, said JLL economist Ronak Bhimjiani.
“High underlying inflation means robust rental growth continues to act as a crucial buffer, preserving real returns and ensuring well-leased, prime-grade assets maintain a defensive premium relative to other asset classes,” he said.
Knight Frank chief economist Ben Burston says the rate path ahead remains uncertain.
“The upward trajectory will dampen liquidity in coming months, and the fact that further rate hikes remain a possibility in early 2027 will keep investors watchful as we head into the new year.”
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Most exposed sectors
Commercial borrowers tend to feel each rate rise more sharply than home buyers, Ms Rader said this is because lenders typically cap commercial loans at lower loan-to-value ratios, test serviceability against interest cover on rental income, and offer shorter terms at higher margins.
“Every rate rise therefore cuts borrowing capacity more sharply and lifts the equity required, while yields on smaller assets have little room to absorb higher debt costs.”
Refinancing adds to the pressure. Nearly 30% of commercial real estate debt matures between 2026 and 2028, according to BWP Advisors, and many owners now face much higher funding costs than when they borrowed.
Risk varies by sector and asset quality:
Office
In office, gross yields sit at or below 5.5% in every capital measured except Brisbane, according to realcommercial.com.au’s Commercial Property Update published in September. This suggests the income on offer may not cover the risk of vacancy and higher borrowing costs.
The risk is real: Property Council data shows average vacancy across all CBDs sits at 14.9%, up 0.1% over the first half of the year, while NAB expects office values to fall about 1% over 12 months. For investors, that means accepting thin returns or waiting for prices to adjust.
Mr Bhimjiani said the gap between prime and secondary assets is widening, which has been called the flight to quality phenomenon.
“Limited prime grade space continues to support rental growth. But your C- and D-grade assets that are not in core locations probably are fit for adaptive reuse at some stage.”
Incoming WFH laws in Victoria, and the wider WFH push, has created a ‘flight to quality’ phenomenon where experts say some lower-grade buildings will need to be repurposed. Picture: Unsplash, Inset: Getty
Retail
Retail is the investor favourite, despite inflation, high rates and cost-of-living pressure on households. JLL puts investment at a record $16.3 billion in the 12 months to Q3, with shopping centre vacancy at 4.4% in the first half, the lowest since 2018.
It’s easy to see the appeal. Supply is tight, with CBRE forecasting only 700,000 sqm of new shopping centre space nationally in 2026–28.
Retail also pays more than other sectors, with gross yields above office and industrial in all five capitals, according to realcommercial.com.au’s Commercial Property Update.
But sentiment is weak. NAB’s retail sentiment index fell 27 points to -7, and retail values are expected to slip 1.3%.
CommBank reported in July that up to 160 stores could close from retailer administrations — even before David Jones collapsed.
Retail remains most exposed to economic headwinds and the Black Friday-Christmas spending period could be the litmus test. Picture: NewsWire / Andrew Henshaw
For investors, the type of centre matters. The Property Council says neighbourhood centres anchored by essential retail are proving more defensive, while assets reliant on discretionary spending face tougher conditions.
Ms Rader now sees retail as the most exposed sector, with higher interest rates and the rising cost of basic items likely to squeeze households.
“We may see households tighten budgets and revise non-needs based items,” she said.
Industrial
Industrial is the strongest sector, with JLL data showing record gross take-up of 1.49 million sqm in the September quarter, up 20%, with national vacancy down from 4.8 to 4.6% and completions at their lowest level since Q3 2021.
NAB expects industrial values to rise 1.2%.
According to realcommercial.com.au’s Commercial Property Update, Industrial sales were up 27% in the year to June. But the report says the recent tightening in yields is likely to slow as higher interest rates push them up.
Ms Rader sees industrial as less exposed than retail but warns challenges remain.
“Overall affordability pressures for businesses and ability to pay increases to rent will make it a little tougher to do business.”
Real Commercial senior economist Anne Flaherty also believes demand for AI data centres could crowd out other industrial investment.
One of Goodman’s data centre developments in Sydney as of July 2026. Picture: Goodman
What we can expect from here
Few expect a quick turnaround.
“A broader move of private investors into commercial property is likely to wait until there is clear evidence the rate cycle has peaked and greater certainty returns to the economy,” Ms Rader said.
“We haven’t seen yields revise in line with increases to interest rates. However we may start to see it pressure upwards, particularly those assets which may be distressed.”
Mr Bhimjiani said for now, commercial lenders will remain highly selective, “prioritising quality, income-secure assets that can withstand restrictive monetary settings”.
So what should investors do? Experts point to the basics: check when debt is due, how much of it is hedged and whether rent covers interest comfortably, and favour prime assets over secondary ones.
“Locations and assets that can offset this with strong income growth will be best placed to weather weaker sentiment in coming months,” Mr Burston said.
Ms Rader’s advice is to look at very local indicators of supply and demand.
“Take your time — and be very selective,” she said.