Now is the time to buy commercial property, with the market poised for a multi speed recovery to commence in mid-2025, according to Knight Frank’s outlook report, which forecasts  trends for the commercial property market next year. 

Knight Frank’s Australian Horizon 2025 report found while some segments of the market still had further to go in terms of pricing readjustments, well-located core assets have now largely repriced after a  downturn lasting two and a half years, and are at a cyclical low. 

“Investors acquiring assets now, after values have adjusted down, but have not yet started the recovery, will be well-placed to see strong returns in years to come,” said Knight Frank Chief Economist and  report author Ben Burston. 

“As the market returns to growth, we expect core assets in Sydney to lead the way. 

“Within Sydney, the industrial sector is likely to be quickest to return to growth. Industrial assets have  largely been resilient over the past two years due to strong rental growth. Even as supply levels rise,  most investors retain confidence in the long-term growth outlook and many are still seeking to deploy  additional capital into the sector. 

“Offices are likely to follow, but there will be substantial variation by grade and location. Core CBD offices  will be most sought after, reflecting the shifting pattern of tenant demand, while non-core CBD and  suburban offices will take longer to recover, and the market will remain bifurcated at asset level.  

“As in past cycles, the recovery in Sydney will gradually extend to other cities, with Brisbane will likely  be next in line, benefitting from the strong economic growth of South East Queensland and lower supply  levels compared to Melbourne.” 

In line with the recovery, yields for Sydney office and industrial assets are expected to fall from 2025,  with Knight Frank’s Australian Horizon report forecasting the below yields: 

Mr Burston said the strength of the commercial market recovery in 2025 would be dependent upon the  path of interest rates, and in particular, how far rates will be cut next year when the Reserve Bank of  Australia shifts stance to start easing monetary policy. 

“On the basis that the rate cutting cycle commences sometime in the first half of the year and long-term  rates ease in line with this, we expect the property market recovery to commence in mid-2025,” he said. 

“However, investors need to look beyond the timing of the first cut to the cash rate and instead tune into  the evolving debate on the neutral interest rate and what it means for long-term interest rates, ensuring their strategy is adaptable to different scenarios.” 

Knight Frank National Head of Institutional Sales and Capital Advisory Ben Schubert said that  after taking a period of time to reappraise their strategy over the past three years in which values have  corrected, investors were poised to re-enter the market. 

“The Australian commercial property market now represents good value for investors, and the obstacles  to investing are subsiding,” he said. 

“The macroeconomic environment is more certain with interest rates expected to fall next year – although views on the extent and timing of cuts continue to shift off the back of events such as the recent  US election – and the revaluation cycle in many sectors having concluded, or close to being finished. 

“Many groups have now reset their expectations and are ready to home in on their preferred investment opportunities. 

“In the office market, sentiment has improved significantly in recent months; we have seen more and  more investors attracted by lower pricing and increasingly ready to engage in upcoming campaigns. 

“We have seen a significant pick up in activity in the Sydney CBD in particular, with several properties  recently being transacted including 55 Pitt Street, 255 George Street, 333 George Street and 388 George Street. 

“These sales confirm pricing has stabilised and have engendered greater investor confidence. 

“Cross-border capital is making a strong return, with investors coming back into the market from  Singapore and Japan, as well as Europe. Activity has picked up most strongly in Sydney, and we expect  to see more transactional activity in Brisbane and Melbourne next year.” 

Greater divergence expected between prime and secondary office markets 

Moving forward there is expected to be a greater divergence between prime and secondary office markets, especially as supply at the top end of the market tightens, according to the Knight Frank Australian Horizon 2025 report. 

The research found there had been a slowdown in new development, with the office market facing  several years of limited new supply as developers find it difficult to meet feasibility thresholds. 

“As tenants perceive the risk of a shortage of prime space later this decade, particularly in Sydney and  Brisbane, it will bring them to the market earlier and act to drive up face rents on new developments,”  said Mr Burston. 

The report found that 2024 saw a large influx of new office supply in Sydney but there would be virtually  no new supply until 2027, with the refurbished 33 Alfred Street the only major scheme to be delivered  in 2025. 

Brisbane will see a significant quantum of prime stock delivered in 2025, but no major schemes are  scheduled to complete in 2026 and 2027. 

The Australian Horizon 2025 report found that outside the office market, retail markets were set to  benefit from significantly higher demand as investors re-engage with the sector and seek to rebuild  and a favourable outlook for income growth will attract more capital in 2025. 

Many have been heartened by the relative resilience of the sector during a difficult period  

“Other groups are more focused on living sectors and have taken time over the past two years to better  understand the feasibility constraints and planning frameworks, and are now better placed to execute  on new developments and form new partnerships,” said Mr Schubert.  

To download Knight Frank’s Australian Horizon 2025 report please visit: Horizon Report 2025 | Knight  Frank

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