Core real estate
An uneven recovery across core real estate markets in 2025
In 2025 domestic and international institutional capital cautiously re-entered Australian core real estate markets, as the stabilisation of interest rates reduced pricing volatility and narrowed bid-ask spreads following the 2022-2024 hiking cycle. During that period, many investors became underweight to real assets. Improvements in value and pricing clarity supported a significant increase in transaction volumes across all core subsectors, with JLL data showing a 27% increase in volumes over the prior year to ~$85.6 billion. With investment yields also firming, the market met the technical definition of recovery, however the pace and trajectory of the recovery varied materially by sector – retail, industrial, office as well as by geography with Sydney and Brisbane outperforming other capitals.
Retail outperforms, again
Buoyed by more favourable capital market conditions and resilient domestic demand, retail fundamentals strengthened through 2025. A resilient labour market sustained household spending, with retail turnover growth tracking well above the pre-COVID five-year average. At the asset level, foot traffic normalised and leasing spreads improved, particularly across centres anchored by needs-based retail and experiential offerings. These characteristics reinforced yields and values and continue to show resilience against e-commerce disruption. As a result, transaction activity increased materially over 2025 outpacing both industrial and office volumes as investors sought investments offering durable cashflow and clear earnings trajectories.
Industrial – continued capital flows, but returns normalise
Industrial property continued to attract capital from institutional investors and developers, however the sector continues the theme of normalising returns that began in 2022. While rent growth persisted, it became increasingly fragmented by location, with stronger growth recorded in supply constrained precinct such as Western Sydney and Southern Brisbane, while conditions in Melbourne were comparatively softer. The exceptional post-COVID rental surge has moderated in recent years as development activity – committed and speculative – has outpaced demand. By year end, the national vacancy rate was approaching its long-term equilibrium level of ~4%, and leasing incentives began to drag on net effective rents, signalling a transition from a landlord-favourable environment to a more balanced leasing market. As vacancy rates approach equilibrium and incentives rise, industrial performance shifts from a re-rating cycle to one increasingly dependent on sustainable rental growth, moderating forward return expectations.
Office continues to lag, but a recovery underway
The office sector remained the laggard across core real estate in 2025, as structural shifts in work practices continued to impact demand and vacancy rates remained elevated across all markets. There were however signs of improvement in premium CBD assets, with tighter vacancy and rental growth recorded for high-quality, well-located buildings. This ongoing bifurcation of performance across grade and location remains firmly entrenched. In line with this trend, lower grade assets in poorer locations continued to see erosion in value, despite record low levels of new supply. Elevated incentives and ongoing capital expenditure constrained effective income growth outside of prime segments, tempering recovery and reinforcing selective investment.
2026 core outlook
A fragmented market
As in 2025, Australia’s commercial property market is unlikely to move in unison in 2026, with performance expected to remain fragmented across sectors, geographies and asset quality.
Any further increase in interest rates would create a more challenging environment for income returns in leveraged property funds. That said, we expect the broader impact on capital values and transaction volumes to be limited, given the depth of institutional capital seeking redeployment following an extended period of under-allocation during the previous hiking cycle.
In this environment, disciplined capital management will remain critical. With debt costs elevated and asset yields compressing selectively, the spread between asset yields and cost of debt continues to narrow, reinforcing the need for a prudent approach to leverage. As a result, we expect a greater proportion of transaction activity to be driven by institutional mandates rather than private capital syndicates where distribution yields are paramount.
Rising retail opportunities
We anticipate a meaningful volume of retail assets coming to the market in 2026, with many opportunities likely to be transacted through competitive processes. A portion of this supply is expected to originate from large wholesale unlisted funds seeking to realise assets to meet redemption requirements, as well as from selective divestments of non-core holdings by major listed REITs as capital markets continue to open.
As major institutions withdraw from wholesale pooled funds toward direct management mandates or joint ventures, we expect to strengthen institutional relationships as these investors seek partnerships with fully integrated retail specialists.
Competition increasing for assets, but pockets of value remain
Competition for assets is expected to intensify across all subsectors in 2026, particularly within retail and industrial markets where income durability remains most evident. While pricing tension is likely to increase for stabilised, institutional-grade assets, we believe gaps will continue to emerge across the cycle. Identifying these opportunities will require disciplined underwriting, deep sector expertise and strong origination capabilities, particularly where complexity, repositioning or mandate misalignment limits broader buyer participation. We also expect to continue selectively pursuing and capitalising on off-market acquisitions where relationship driven sourcing and execution certainty provide a competitive advantage in an increasingly competitive environment.
Alternative real estate
Continued strong momentum through 2025
While core markets remain fragmented and increasingly competitive, alternative real estate subsectors maintained strong momentum through 2025, supported by a favourable macroeconomic backdrop and structural tailwinds. Persistent inflation and elevated construction costs continued to constrain development, limiting new supply and underpinning earnings growth for existing assets, particularly in sectors supported by strong fundamentals.
As noted previously, consumer spending strengthened over the year, most notably among mortgaged households, as successive interest rate cuts assisted disposable income and improved household confidence.
Investor demand for alternative real estate remained strong during 2025, with capital increasingly allocated to opportunities offering lower correlation to traditional assets classes while simultaneously delivering attractive risk adjusted returns. The sector benefitted from strong offshore capital inflows, as global institutions increased allocations to Australian real estate assets in response to structural tailwinds associated with strong population and economic growth, favourable trade relations with both US and China and low sovereign risk profile. Easing interest rates and narrowing debt spreads further supported market liquidity and improved conditions for equity investment.
High conviction thematics in focus for 2026
Looking ahead, investor attention continues to focus on high-conviction, long term themes within alternative real estate, particularly in emerging and less saturated subsectors. These segments are often supported by favourable tailwinds such as demographic shifts, evolving consumer preferences, regulatory shifts and structural supply/demand imbalances.
In 2026, we expect continued momentum across the social infrastructure, living, and leisure subsectors. These areas remain supported by favourable planning environments, increased demand, growing capital appetite across both debt and equity, and rising acceptance of the underlying investment solutions.
At the same time, markets are placing greater value on operating real estate platforms combining strong governance with the ability to influence asset-level performance. Investment in systems, customer experiences, and operational processes is increasingly becoming a source of competitive advantage, reinforcing the importance of active management in driving sustainable, long-term value creation.
As capital increasingly seeks assets with operating leverage and differentiated income profiles, demand is rising for institutional-grade asset management and disciplined portfolio construction. These capabilities are key to unlocking operational efficiencies, supporting exit liquidity and enhancing overall investment outcomes across the cycle.
