Australia’s commercial property recovery is expected to widen in 2026, with conditions improving across more locations and asset types as confidence returns and supply tightens, according to Knight Frank’s new Australian Horizon 2026 report.
Chief economist and report author Ben Burston said the recovery to date has been uneven but is now gaining traction across more markets.
“As we predicted in last year’s report, industrial asset values have been quickest to start the recovery, spurred by yield compression in Sydney and Brisbane,” Mr Burston said.
“Capital values are up by 3.1% on average over the past year, with the strongest growth in Brisbane where asset values are up by 5.5%.”
“Retail markets have staged a similar bounce back, with average capital values up by 2.1% over the past 12 months, led by super and major regional centres and neighbourhood centres.”
He noted the office sector has lagged but is now showing clearer signs of improvement.
“Office markets have been slower to respond, and have also demonstrated a greater degree of divergence, but growth has now returned across all major CBDs led by Sydney, Brisbane and Adelaide.”
Mr Burston said Sydney’s core CBD precinct has been a lead indicator.
“Sydney has been a bellwether for the health of the wider office market, and to date the recovery has been strongest in the core CBD precinct, linked to the improving performance of the leasing market. Melbourne has witnessed a similar trend, with sustained demand and strong rental growth in the Eastern Core.”
Looking forward, he expects the rebound to spread geographically.
“We expect the recovery to broaden beyond a narrow band of core assets and locations in each sector.”
He pointed to Sydney’s Midtown and Melbourne’s Western Core as precincts poised to join the next phase of growth due to tightening supply.
Supply conditions loom large in Knight Frank’s analysis. The report highlights the impact of rising “economic rents” – the rental level needed to make new development feasible – which have surged since 2021.
“For developers, the hurdle to start new projects has never been higher, which will constrain the supply pipeline across all property sectors and support the performance of existing assets over the coming years.”
In office, the firm says rental growth will continue even with elevated vacancy.
“High quality prime assets are achieving strong leasing outcomes, and we expect rental growth to accelerate in 2026-27 as the supply pipeline diminishes.”
Industrial vacancy is forecast to stabilise before the next round of growth begins.
The report notes construction volumes will fall from 2.6 million square metres in 2024 to a projected 1.8 million square metres in 2026 as developers respond to higher costs and financing constraints.
In retail, Knight Frank says larger assets will have the advantage.
“Dominant shopping centres are best placed to take advantage due to their lack of immediate competition… and greater mixed-use optionality arising from their superior location.”
Mr Burston said investors will increasingly need to look outside the traditional core to find opportunities, as pricing has begun to lift in Sydney’s CBD Core and other stabilised markets.
Knight Frank’s Top 7 Property Predictions for 2026
1. Hunting season is in full swing for commercial property investors, but they may need to look beyond the core markets
2. Darkest before dawn: Melbourne a compelling proposition for patient investors
3. Time for a new narrative: ‘Beds & sheds’ giving way to a broader upturn
4. From gridlock to green light: High economic rents will limit new supply and drive rent growth
5. Prime office rental growth will defy high vacancy rates
6. Industrial vacancy to stabilise before the next wave of growth
7. Think big: dominant shopping centres the pick of the bunch
