Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 601

Has Australian commercial property bottomed?

Over the past few years, commercial real estate sector returns have been dominated by the largest interest rate cycle increase in decades. The adjustment to higher rates contributed to the most significant valuation repricing since the Global Financial Crisis (GFC), as you can see in Chart 1 below.

Chart 1: Indicative market capital values and total returns across the Prime Office, Industrial & Logistics (I&L) and Sub Regional Retail sectors

Source: JLL Research, Charter Hall Research. Click to enlarge.

Today, however, the Australian prime property sector offers compelling risk-adjusted returns. Yields are attractive compared to historical levels and offer high-quality cashflow, with forecast equity IRRs now at large premiums to bond yields. Given the gains across the broader listed equity markets over 2024, real estate sector weightings are generally below targets for institutions, increasing the prospects for material redeployment into property.

Promisingly, a recovery was sustained over the second half of 2024. Annual transaction volumes in the physical market ended 2024 at the highest level since mid-2022. Reinforcing this outlook, the spread to net tangible assets (NTA) in the real estate listed equity markets has reduced and, in some instances, has turned into a premium; a notable gain from the average ~30% discount a year ago. 

Broker and valuation forecasts, supported by increased transaction evidence, point toward the stabilisation in capitalisation rates across the Prime core real estate sectors (see Chart 2).

Note: Capitalisation rate is calculated by dividing net operating income by a property's current market value. A higher market value implies a lower capitalisation rate.

Chart 2: Indicative market capitalisation rates across the Prime Office, Industrial & Logistics (I&L) and Neighbourhood Retail sectors

Source: JLL Research, Charter Hall Research. Click to enlarge.

2025's office market: perception, reality and the great opportunity

Office had the largest reduction in property values (-21%) in the recent downcyle, given the uncertainty cast by the pandemic lockdowns and the capacity for demand to absorb a surge of lagged new supply completions. However, with return to office mandates now becoming more prevalent, the sector is rebounding with an increase in tenant demand.

The trend back into the office continues to accelerate (see Table 2) as the limitations of non-office attendance become patently clear to companies and government entities look to drive productivity and their corporate culture. Since the end of the lockdowns, the occupied stock across Australia’s Prime Office market has increased by 9%; the third strongest growth globally.

Table 2: Return to office mandates (% employers)

Ironically, meaningful reductions to office space in flexible arrangements could only be achieved by reducing staff flexibility. The increase in flexible working did not translate to a contraction in office occupied stock. Prime office area increased with a growing workforce; and tenancy areas were mostly maintained or increased.

Desk sharing arrangements proved to be impractical for most firms as this confined talent to fixed or advanced-booking schedules. This was challenged by the dynamic preferences of staff and the ebb and flows of workflow. Contingent desk space was a mechanism for flexibility. Flexible policies also require greater collaborative and communicative space (i.e. more meeting rooms).

A growing chorus of major organisations have expressed the significance of office-centred cultures and intensified efforts to encourage attendance, including more rigorous mandates and bonus-linked attendance. To incentivise the return and office productivity, firms have also focused on the quality of the offering through improved amenities.

Cyclical and secular forces are moving in favour of the office market

Asset pricing looks set to be supported by the downward trajectory of interest rates and borrowing costs. Meanwhile, higher construction costs have endured and existing asset values sit well below their replacement costs. This has led to a significant reduction in forward supply. 

Office assets typically have longer lead-times given the asset, planning, and locational complexities. As such, the next decade will likely be affected by a period of undersupply for modern office assets in core CBD locations. Existing assets with superior credentials will benefit from greater pricing power. This trend has already emerged in markets such as Brisbane, where insufficient supply has contributed to effective rent growth of 20%+ over the past two years.

As detailed in Charter Hall's recent ‘Why Australia’ report, this should unfold against the backdrop of long-term economic fundamentals that continue to strengthen against the other major global economies and contribute demand across the Prime Real Estate sector.

Over the next decade, Australia has the strongest economic, population and employment growth forecasts – between two to four times greater than the G12 nation average growth rates. In a world with rapidly ageing populations, Australia benefits from a younger and more productive population.

Office demand also continues to benefit from a range of enduring mega trends, headlined by the AI transformation. AI jobs are forecast to increase by above 164,000 by 2030 and generate between 800,000 sqm and 1.3 million sqm of additional office space demand. Moreover, technological advances have accelerated white-collar job growth over recent years in industries such as cybersecurity, tax, defence and automation.

Looking ahead, these trends are expected to continue, with leasing volume growth to be supported by the positive economic momentum against the backdrop of declining office supply. We are of the view that the earlier correction in asset values was largely cyclical, as markets adjusted to higher interest rates and slowing economic conditions. As this trend recedes and secular tailwinds strengthen, high-quality offices are providing appealing forward-looking return profiles.

Sources: JLL Research, Morgan Stanley, ABS, Oxford Economics, Tech Council of Australia, Charter Hall Research.

Steven Bennett is Chief Executive of Direct Property and Sasanka Liyanage is Head of Research at Charter Hall Group, a sponsor of Firstlinks. This article is for general information purposes only and does not consider the circumstances of any person, and investors should take professional investment advice before acting.

For more articles and papers from Charter Hall, please click here.

 

RELATED ARTICLES

Unique factors drive Industrial and Logistics property demand

The future remains bright for industrial property

Three opportunities in property in Australia and APAC

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Latest Updates

Taxation

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

7 key charts on the state of the Australian property market

The Australian property market stirs fierce debate - often bullish optimism versus crash predictions. But beyond the noise, seven charts reveal what's really driving prices and the outlook for residential real estate.

A simple alternative to the $3 million super tax

Division 296 aims to introduce improved fairness into the superannuation system, yet is overly complex. This scours the world for better ideas and suggests a simpler alternative which can achieve the same goals.

CBA and the index conundrum for super funds

After the hyperbolic rise in CBA shares, super funds are floating the idea of carving out the weightings of ASX bank securities and indexing them within their portfolios. This looks at why that might be a big error.

Strategy

10 policies to drive Australian productivity higher

Here's a comprehensive list of proposed reforms to fix Australia's stagnating economy, including introducing a flat income tax rate, reducing migration, and making childcare tax-deductible.

Interviews

Where to find big winners in Asia

As more money looks for a home outside the US, Asia may soon get some love. Fidelity's Anthony Srom outlines the best places in Asia to invest, including in Chinese consumer names, Indian financials, and Thailand.

Investment strategies

We have trouble understanding the time value of money

We overvalue the present and underestimate the future - it’s a cognitive glitch called hyperbolic discounting. It affects savings, spending, and loans, and it's more common - and costly - than we think. 

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.