_7 top predictions for the commercial property market in 2026: Knight Frank

According to the report, the recovery in the commercial property market has begun, with 2025 seeing a return to growth that is set to strengthen in 2026. 

Knight Frank Chief Economist and report author Ben Burston said the recovery has so far been selective across certain asset types and locations, but it is expected to broaden this year.

“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,” he 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.

“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. 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 ahead, we expect the recovery to broaden beyond a narrow band of core assets and locations in each sector. In industrial markets, we expect the recovery to extend to Melbourne, while in retail markets, growth will pick up in sub-regional centres, as positive sentiment spills over from the larger centres.

“In office markets, we expect continued growth in Adelaide and Brisbane, while in Sydney and Melbourne, we expect to enter a second phase as growth extends beyond the core precincts previously identified. Adjacent markets, particularly Midtown in Sydney and the Western Core in Melbourne, should see a return to growth as they join the core in starting to benefit from a thinning supply pipeline.”

Knight Frank’s Australian Horizon 2026 report provides insights into the state of play in Australia’s commercial property market right now, as well as making 7 key predictions for the market next year that will help guide investor decisions as the market continues its recovery.

Over the past two years, Knight Frank has highlighted the investor opportunity arising from the cyclical downswing, which opened up a window to secure quality commercial property assets at attractive pricing with significantly reduced downside risk and a high probability of strong returns over the next growth cycle.

There is still time to buy, with the early-cycle window remaining open in most markets, but since pricing has moved off the bottom in favoured markets like the Sydney CBD Core office market, many owners are now less willing to trade given the anticipation of cyclical recovery. As a result, in 2026 Knight Frank expects investors to start to broaden their focus to other markets where the recovery is yet to gain as firm a footing.

Melbourne has been slower to turn the corner and investors risk missing the bigger picture amidst the noise. The negatives of taxation are widely appreciated but not the prospect for strong growth over the long term. Similarly, investors are aware of the high overall vacancy rate but fewer are tuned into the looming slowdown in new supply. Off the back of a larger downturn than in other cities, downside risk is now limited and those prepared to look through the current headwinds can take advantage of very attractive pricing.

The ‘beds & sheds’ narrative (referring to the perception of a stronger outlook for residential and industrial property compared to other sectors) has become a familiar refrain, but after nearly a decade, outperformance of these sectors has run its course and the outlook for the key sectors is on a much more equal footing. Office and retail assets now offer stronger income returns, and rental growth prospects are increasingly positive. They are also readily investable. and new entrants can acquire large holdings of stabilised assets relatively quickly, to take advantage of the nascent recovery.

Economic rents – the level of rent at which the construction of a new development becomes feasible – have surged since 2021 due to a perfect storm of rising construction costs, rising interest rates, high incentives and falling capital values. 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. New office developments that do proceed will be skewed to core CBD locations where rents are highest, and industrial developers will similarly be attracted to infill locations where higher rents are achievable and also focussed on land banking to position themselves for the next development cycle.

Logic has it that rent growth should correlate closely with the level of vacancy. History largely bears this out, but there are signs that things are changing in the office market, with strong prime performance in Brisbane, Adelaide, Sydney’s Core and Melbourne’s Eastern Core, notwithstanding that overall vacancy remains above 10%. High quality prime assets are achieving strong leasing outcomes, and we expect rental growth to accelerate in 2026-27 as the supply pipeline diminishes.

The level of construction in the industrial market is quickly adjusting to higher vacancy and higher economic rents. From a high of 2.6 million sqm in 2024 across the East Coast, Knight Frank’s forecast for 2026 is a significantly lower 1.8 million sqm, with demand to be diverted back to pre-commitments for tenants seeking to upgrade. Vacancy and effective rents will stabilise on average in 2026, but continue to diverge at precinct level, before the next phase of broad-based growth commences in 2027.

The retail sector will continue to see strong performance on average, but the rising tide will not lift all assets equally. Dominant shopping centres are best placed to take advantage due to their lack of immediate competition, a flight to quality from retailers who realise they don’t need to be everywhere all at once and greater mixed-use optionality arising from their superior location and wider range of complementary growth opportunities.

Read the full report.