Getting beyond ‘survive to 2025’: What’s next for commercial property

The commercial property sector is moving to its next phase and a wide range of influences that could hit demand for local goods and services are coming into play.

A total of 13,450 businesses became insolvent in 2024, a 46 per cent rise from 2023.

“Survive to 2025” is a phrase that has been used within the commercial real estate sphere since the pandemic first threw the sector into chaos in 2020.

But while market conditions have changed considerably over the past five years, many of the challenges that emerged in 2020 remain front of mind for businesses and investors exposed to the sector.

As 2025 begins, here are five key trends likely to shape Australia’s commercial property market over the coming year.

Falling rates

High borrowing costs have been one of the primary factors behind the dearth of commercial property transactions seen over the past two years.

After holding interest rates steady for over 12 months, the Reserve Bank is widely expected to cut rates this year, with most forecasters anticipating a fall over the first half of this year.

Should interest rates move lower, this will reduce the hurdle for new acquisitions, creating ­opportunities for value-seeking investors.

Lower interest rates could also stabilise cap rate compression and help to drive a recovery in pricing. However, the extent to which this happens will depend on the pace and magnitude of any interest rate cuts.

Tight retail space

A record number of businesses entered insolvency in 2024, with retailers among the hardest hit. While conditions are expected to remain challenging this year, opportunities are emerging off the back of strong population growth and a collapse in the supply of new retail space.

According to JLL, the volume of new retail space due to come online over 2024 and 2025 will be just 21 per cent of the 10-year average level. Between 2024 and 2027, Australia’s population is forecast to grow by 1.7 million. Over this time, less than one third of the new retail space needed is expected to be completed.

Investors are catching on, and already this has driven a resurgence in shopping centre investment. Neighbourhood and large format centres are also likely to see increased demand, particularly in areas where population growth is most concentrated.

Hot logistics

The industrial and logistics sector will remain one of the strongest performers in 2025, fuelled by the ongoing growth of e-commerce. While industrial development is ramping up in response to increased demand, supply is not predicted to keep up, particularly in urban areas where land is scarce.

REA Group economist Anne Flaherty

Larger and more advanced distribution centres are also needed to accommodate a growing population, as well as consumer expectations for faster delivery times. As a result, vacancy rates are expected to remain low and rents are predicted to grow further in 2025.

Sustainability push

Businesses and investors will increasingly focus on sustainability measures in 2025, particularly in the office sector, where high ­vacancy rates are providing tenants with more choice.

In recent years, this has been reflected in a growing share of office occupying businesses searching for premises with a minimum four-star NABERS rating.

Landlords who fail to upgrade assets to meet energy efficiency standards or provide sustainable solutions risk losing tenants and capital value. Buildings with higher sustainability credentials will continue to attract higher rents.

Insolvency risks

The economy has grown at a snail’s pace over the past two years and, on a per capita basis, has been in recession for over a year and a half. A total of 13,450 businesses became insolvent in 2024, a 46 per cent rise from 2023 and more than double the number seen in 2022.

The construction sector accounted for one in four insolvencies in 2024, followed by accom­mo­dation and food services. Assets exposed to these sectors will continue to face heightened vacancy risk this year.

The impact of the Trump presidency in the US is also likely to have implications for Australia.

While Australia currently enjoys free trade with the US, should Donald Trump carry through on his election promise to impose 10-20 per cent tariffs on all countries, this could decrease demand for Australian goods and services.

The extent to which tariffs affect inflation in Australia will also have implications for interest rate settings, presenting another key risk to our economy.

Anne Flaherty is an economist at REA Group.