Interest rates have been weighing on commercial property investing in Australia since they started rising again this year, but experts say the market remains resilient.
Commercial property deal activity slowed down during the first quarter of 2026 as interest rate hikes started to bite, despite the growing transaction momentum throughout 2025.
The Reserve Bank has increased interest rates three times so far this year to tame higher-than-desired inflation – reversing last year’s three rate cuts – as economists forecast more rate hikes for this year.
Rising interest rates increase borrowing costs, which can reduce investor demand and put downward pressure on investment activity.
REA Group senior economist Anne Flaherty said commercial property investors had been more cautious since the rate hikes.
“We’ve had a bit of a slower start to the commercial property market in 2026,” she said.
“The main reason for that is that we’ve had interest rates increasing. Last year, we actually did see transaction volumes bounce back, but with the higher interest rates this year, buyers are being a little bit more cautious.”
But John Nockles of CVA Property Consultants said the commercial property still had very strong fundamentals despite the rate rises, describing the outlook as “resilient”.
“I think resilient is a good word to use,” he said. “I can’t see things taking off like we saw out of Covid or pre-2016-17, but I can certainly see a relatively stable and tight market over the next 12 months.
“It’s always been about the long game with commercial, it’s never been about the short game, and investors and people entering this market should understand that.”
Guy Stafford of McGees Property Brisbane said investor appetite remained robust, with a focus on high-quality investments.
REA Group senior economist Anne Flaherty says commercial property investors have been more cautious since this year’s interest rate hikes. Picture: Supplied
“Investors will continue to look for high quality, whether it be in the property or in the tenant itself,” he said.
“They’re seeking long-term security, ease of entry and something that complements their current portfolio or a direction they want to get in.”
Budget boost
Australia’s commercial property market has been tipped as a potential winner from this year’s controversial federal budget tax overhaul last month.
The budget delivered a major negative gearing hit to residential property investors, however commercial real estate was left untouched and retained its negative gearing benefits.
John Nockles of CVA Property Consultants says the commercial property market remains resilient. Picture: Supplied
Experts suggest the changes may make commercial property relatively more attractive compared to residential.
Mr Nockles said the budget had created a little bit of temporary paralysis among investors, but may end up directing more investors into the market.
“I think that it will stimulate much more interest and investment into our sector than probably where we’ve seen it being in residential,” he said.
“[Investors are] looking to exit out of other asset classes such as residential, and they’re looking to turn their attention to commercial property, mainly industrial.”
Australian commercial property quarterly transaction volumes
Source: MSCI
Ms Flaherty said inflation-linked leases may also make commercial property more attractive in the current inflation environment.
“In a higher inflation environment, commercial investing can be seen as more attractive sometimes because leases are often pegged to inflation,” she said.
“So with the recent changes in the budget and a high inflation environment, we could start to see demand increase.
“On the one hand, we have interest rates rising, which typically decreases buyer demand, and on the other hand, we’ve had a budget that has disincentivised residential investing.
Year-on-year change in Australian commercial property quarterly transaction volumes
Source: MSCI
“On the ground, we’re starting to see signs that there are more people who are looking instead to explore investing in commercial real estate, but whether that’s enough to counteract the effect of higher interest rates and high inflation remains to be seen.”
The latest commercial property investment data shows that transactions totalled $8.2 billion in Australia during the first three months of the year, down 19% on Q1 2025, according to MSCI.
But there’s more to the year-on-year decline though, with last year’s first quarter marking the strongest opening quarter since 2022, driven by several large office and retail transactions.
This year’s first-quarter figures fall within the period of two of the three interest rate hikes so far this year, and the initial few weeks of the Middle East conflict.
Looking at longer-term first-quarter benchmarks, Q1 2026 volumes sat around 11% below the five-year average, but 9% above the 10-year average, pointing to a market that is still in recovery mode.
English (US) · 