After enduring a prolonged period of market correction, the commercial property sector is expected to show signs of revival as interest rates have finally begun their downward journey. This shift in monetary policy marks a potential turning point for an industry that has weathered significant challenges over the past few years. As we look toward 2025, there's reason for cautious optimism as clarity emerges, stabilisation continues, and opportunities arise for savvy investors.

The window for investors to capitalise on cyclical lows may be closing faster than anticipated. Market recovery indicators that were just theoretical possibilities months ago are now materialising across various data metrics. Negative returns, while still in unfavorable territory, have begun trending upward across multiple asset classes – a clear signal that we may be emerging from the trough phase of the property cycle.

Perhaps most significantly, the widening spread between capitalisation rates and government bond yields has created an increasingly attractive risk premium for investors. As interest rates fall, this spread is poised to drive renewed investment activity, particularly from buyers seeking relative value compared to other investment options.

The recovery, however, is not uniform across all sectors. Industrial property continues to demonstrate resilience, maintaining its position as the "golden child" of commercial real estate despite the broader market challenges. Data centres and digital infrastructure are emerging as particularly attractive investment targets, driven by AI adoption and the broader transformation in this space. Retail properties, especially those in neighborhood centres benefiting from population growth, are showing promising signs of recovery.

In stark contrast, the office sector remains problematic, with persistent low occupancy rates hampering recovery prospects. The structural shift toward hybrid work continues to put downward pressure on this asset class, though premium buildings with strong ESG credentials and amenities are expected to differentiate themselves. Meanwhile, healthcare facilities and senior housing represent growing opportunities aligned with Australia's aging population trends, while hospitality shows promising signs of recovery as travel and tourism rebound.

An interesting dynamic is emerging between distressed sellers and opportunistic buyers. Many property owners who have been "holding on" through years of declining valuations are now facing difficult decisions as their refinancing options have narrowed despite falling interest rates. This pressure is creating acquisition opportunities for cashed-up private investors who can move quickly to secure assets at favourable prices.

Unlike equities and bonds, which have already experienced significant value recovery, commercial real estate still offers relatively attractive entry points. Prices remain below their peaks from previous years, providing a buffer for new investments. With construction starts declining significantly, the supply-demand balance is shifting favourably for existing property owners, further more with assets often selling below replacement value, the built form is king.

For patient investors with capital and vision, the current environment represents a potential turning point – one where the fundamentals are aligning to reward those who can identify quality assets with strong underlying value. While "higher for longer" interest rates may continue, they're now heading downward. As banks cut rates, the best buying opportunities won't last long. Investors who move now to re-enter the commercial property market will likely benefit as property values begin to recover.

By Vanessa Rader Head of Research Ray White Group

Related Readings

Secondary office revival: The refurbishment opportunity of 2025 | Commo.

Where commercial property dollars landed by State in 2024 - RWC | Commo.