The first half of 2025 has been a turning point for Australian commercial real estate. After years of rising interest rates, tightening financial conditions and shifting consumer behaviours, the outlook has changed for the better. Falling interest rates, stabilising property values, high yields and economic growth are delivering greater confidence in real assets. 

However, volatility in financial markets and simmering geopolitical risks created by the newly established US administration and its implementation of wide-ranging tariffs have added to economic uncertainty.

Australia, however, is well positioned to ride out any tariff turbulence. The country has a central bank with scope to further reduce rates, a Federal Government with capacity for fiscal stimulus, a stable political environment and continuing high population growth. These are excellent buffers against a volatile environment and solidify Australia’s reputation as a safe haven for global investors.

The retail sector is proving more resilient than anyone thought five years ago, workers are returning to the office and alternative sectors like data centres and healthcare continue to pique investor interest. Driven by e-commerce and logistics, industrial demand remains strong while rising urban density is supporting growth across all sectors. Opportunities are emerging.

Against this backdrop, understanding the shifting dynamics of Australia’s real asset sectors is critical for investors. Here’s our overview on what’s shaping the Australian market for the remainder of 2025.

Rates falling, yields high, total returns improving

Forecasts are for a further 50 basis point of interest rate cuts by the Reserve Bank of Australia (RBA) later this year. After a period of falling commercial property values, stabilisation is in sight. Despite bond yields remaining relatively high, real estate yields are stabilising. 

The uncertainty created by the US administration may have ushered in what could be described as a ‘new reality’ - an extended period of public market volatility, geopolitical risk, below-par global growth and sporadic inflation risk. 

In these conditions, unlisted real assets, such as real estate, health, social, transport and energy infrastructure look more attractive to investors relative to listed equities. This is because of their physical intrinsic value and essential role in keeping society functioning. They typically have high yields with secure income streams, inflation hedging properties and low correlation with equities. Industrial and retail real estate, in particular, are experiencing renewed interest with investor demand returning.

With capitalisation rates relatively steady and income levels rising, total returns rose in the fourth quarter of 2024. The retail and industrial sectors led healthcare and office. We expect this trend to continue in the second half of 2025.
 

Figure 1: Real estate total returns by sector

Past performance is not a reliable indicator of future performance

What a trade war means for real assets

When looking at the potential impacts of global tariffs and trade on the performance of Australian real assets there are several considerations. The first is the direct effects of tariffs themselves. Direct effects are likely to be relatively minor given exports to the US are less than 5% of Australia’s total exports.

The indirect effects are of greater concern. If China or the U.S. experience a sharp downturn then this could be expected to influence growth in the Australian economy. The safe haven argument, however, is persuasive. As mentioned earlier, Australia is well positioned to ride fluctuations in global growth and is expected to remain attractive to global investors due to its political stability, forecast GDP growth and high population growth. These are powerful buffers against global shocks.

While uncertainty has increased in the short term, our view of a broad-based improvement in real estate and infrastructure markets in the second half of 2025 remains fundamentally unchanged. A lack of new supply, particularly in the office and retail sectors and falling interest rates provide support for a recovery.

Source: Oxford Economics

The information in this graph is predictive in nature, may be affected by inaccurate assumptions or by known or unknown risks and uncertainties, and results may differ materially from results ultimately achieved and are not guaranteed to occur.  

The office is back and retail is improving

The office market is showing the first real signs of recovery, with demand improving, workers returning to the office and tenants re-engaging with decisions around their spaces.

Sublease availability has decreased, with major corporates such as large banks and consulting firms taking back space to allow for future expansion. Sub-leasing across Australia's four main central business districts (CBDs) was down 52% in Q1 2025, from 2020 levels, Sydney had the strongest year of take-up since 2016 and Melbourne’s take-up improved.

While vacancy rates have fallen in most city CBDs, they remain elevated, and the market continues to be segmented. Well-located or high quality buildings continue to see strong leasing demand, while other spaces struggle. There is a pronounced ‘flight to quality’, causing tenants to prioritise premium office spaces in core CBD locations.

Source: Dexus Research 

The information in this graph is predictive in nature, may be affected by inaccurate assumptions or by known or unknown risks and uncertainties, and results may differ materially from results ultimately achieved and are not guaranteed to occur.  

The factors needed for a recovery are now in place. Currently, rents are around 20% below levels needed to justify new construction. In Sydney’s CBD, the floor area of projects planned for completion in the next five years is just a third of that completed in the past five years. In Melbourne the figure is similar. As a result, a significant supply gap should lead to falling vacancy rates and a lift in rents over the next five years. 

After years of structural challenges, the retail sector appears poised for growth. Australia has emerged from a per capita spending drought. Wages are now rising faster than inflation for the first time in a couple of years, mortgage payments are falling and tax cuts are flowing through. Both discretionary and non-discretionary spending are rising, and headline sales growth is expected to increase in the second half of 2025. 

At the same time, limited new supply of shopping centres is keeping vacancy rates low.  Construction costs and planning restrictions are acting as natural handbrakes on new supply. The new supply pipeline of subregional and regional shopping space is running at just 70% of the 20-year average and there are no new regional shopping centres in development.

In major cities retail is benefiting from increasing office occupancy and tourism. Investor sentiment is improving, particularly for well-located assets. While retail unlisted funds posted a modest total return of 2.8% in the year to February 2025, they significantly outperformed the broader market's -3.1% p.a. return and were the best- performing sector on the MSCI Australian wholesale index.

Source: ABS, JLL Research, Dexus Research. Shopping centre completions are national. 

The information in this graph is predictive in nature, may be affected by inaccurate assumptions or by known or unknown risks and uncertainties, and results may differ materially from results ultimately achieved and are not guaranteed to occur.  

After a strong run, industrial is normalising

After a period of rapid expansion, the industrial real estate sector is normalising. Industrial take-up improved last year (with retail spending firming and ecommerce sales growing by 12.2% in the year to February 2025). Further growth expected this year as retail sales strengthen. With uncommitted supply below historical demand levels, there are few areas where oversupply is a concern. However, vacancy rates are rising, leading to moderating rental growth in most markets. 

While the industrial is a sector no longer experiencing the runaway rent growth of recent years, and sustained demand mean it will continue to be a resilient investment class.

Source: CBRE Research, JLL Research, Oxford Economics, Dexus Research

Transaction volumes rising

Year-on-year transaction volumes rose 19% in 2024 and, due to a large amount of data centre merger and acquisition activity infrastructure transaction volumes almost doubled. With interest rates easing, and strengthened investor sentiment for alternatives and retail, real asset transaction activity is expected to strengthen in the second half of this year.  While global uncertainty may deter investors from large transactions in the short term the firming outlook for total returns is expected to encourage investment in the medium term.

Source: CBRE Asia Pacific Investor Preference Survey 2025, MSCI Real Assets (excluding M&A), Infralogic (all transaction types)

Summary

As we enter the second half of the year, 2025 is shaping up as a year of transition and recovery. Many kinds of real assets are at a low point in the value cycle. When looking back at such periods in the past they have almost always been acknowledged as good buying points. 

With interest rates now falling, values stabilising, and supply constrained, growing total returns are likely to provide real estate investors with greater confidence as the year goes on. While global risks may be a deterrent in the short term, Australia’s real assets with their intrinsic value and high yields are well positioned to shine over a 3 to 5 year period, shielded by Australia’s strong fundamentals and safe haven status.