Commercial Property Market Undeterred by Higher Rates as Office and Retail Markets Rebound

Leading property group Raine & Horne has just published its latest Commercial Insights report, providing a

window into the state of play of commercial property markets around Australia.

The report identifies the key factors impacting today’s commercial property market, including:

1. Investors are factoring in higher rates

To date, the Reserve Bank of Australia (RBA) has announced two rate hikes in 2026, lifting interest rates by a total of 0.5%.

Investors are starting to factor higher borrowing costs into price negotiations. This calls for sellers to take a realistic approach when it comes to asset pricing.

Angus Raine, Chairman of Raine & Horne Group, said, “In a short timeframe, we have moved from expectations of rate cuts to rate hikes. Higher borrowing costs are, understandably, playing a role shaping buying decisions.

“In particular, investors are focusing on sustainable yields, and realistic asset pricing. This is definitely a shout-out to vendors to meet the market.” 

2. A growing preference for income stability

The high levels of volatility seen on the Australian share market in recent weeks, and more broadly over the past year, have enhanced the appeal of commercial property, backed by its track record for delivering stable and sustainable income through long, and often cost-effective, lease arrangements.

“We continue to see commercial property deliver attractive yields coupled with solid cash flows, which make this asset class attractive to investors,” said Mr Raine.

3. Low supply backed by high demand

In recent years, surging growth in residential property prices has seen a number of substantial commercial property assets converted to residential housing.

Coupled with an already acute undersupply of land devoted to new industrial estates, this is driving the price of industrial assets higher – especially in areas close to CBDs, transport links and infrastructure hubs.

There is little evidence that this will change any time soon.

Sydney’s Inner West is a prime example of high demand meeting low supply, particularly across industrial assets.

Mr Raine said, “On one hand we know that small business confidence is being impacted by conflict in the Middle East. However, the longer-term picture is that improved infrastructure can support business efficiency and productivity, helping to lower costs.

“The completion of the metro rail line through Sydney’s Inner West is making the area particularly attractive for commercial property as it offers exceptional transport links, and a nearby supply of workers.

“Similarly, the announcement of a high-speed rail link between Sydney and Newcastle, is expected to drive the commercial property market across the lower Hunter and beyond.

“The catch is that demand vastly outweighs supply in many of these areas. This is reflected in strong sales results and rapid sale times, with Raine & Horne commercial property experts reporting a backlog of cashed up buyers waiting for a suitable property to become available. The smart money knows that this is the time to buy to reap long-term rewards.”

4. Household spending remains robust

Despite a cost of living crunch, data from the Australian Bureau of Statistics indicates that household spending remains strong – rising 4.6% in January 2026 relative to January 2025. This may change as a result of rising fuel prices and higher interest rates.

At present, however, the unemployment rate (seasonally adjusted) remains at just 4.3%. This is a positive driver for commercial real estate with many businesses ultimately relying on consumer spending for revenue growth.

“The commercial property market relies on a robust economy, and to date, we are seeing consumer spending relatively undeterred by a cost of living squeeze,” said Chris Nicholl, CEO of Raine & Horne. 

“Even if households do rein in spending as a result of higher prices at the bowser, we believe segments of the retail property market will still perform well, particularly small neighbourhood centres that focus on discretionary spending.” 

5. Return to work mandates drive a 2-speed office market

Household spending is being underpinned by the tight labour market. However, as businesses encourage employees to return to formal workplaces, many are recognising the value of providing modern, attractive work places that offer both staff amenity and the cost savings of eco-sustainability.

“We are seeing a 2-speed market emerge in the office sector,” said Mr Nicholl. “Assets that are new or recently renovated are leasing far more quickly than B-grade assets. Owners of old office properties need to be aware that without a significant investment in their assets they could face longer vacancy periods.

“In Sydney’s CBD, for example, owners who are prepared to upgrade assets by investing in improved facilities and flexible fit-outs, can significantly enhance the tenant appeal of their property. Similarly, assets with strong eco-credentials can deliver reduced costs for both tenants and landlords. This is important as tenants typically want to see their leased assets work harder to attract and retain staff as well as contribute to cost reductions.”

Opportunities for portfolio diversification 

Investors can take advantage of the current market to negotiate on sale prices, and diversify their portfolios through commercial property. This can be an appealing strategy for self-managed super funds, and small-to-medium enterprises that wish to invest in their own premises.

For property owners, now could be the time to list, and tap into strong demand from both investors and owner occupiers. 

“Our latest edition of Raine & Horne’s Commercial Insights report shines a spotlight on each area of the market right across Australia. With details of recent sales results, yields and market supply/demand dynamics, it is essential intel for both buyers and owners of commercial assets,” concluded Mr Nicholl.