Australia's commercial property market has had a cautious opening to 2026, but a structural shift triggered by the federal budget may be about to change the investment calculus for brokers with property investor clients.
REA Group's first realcommercial.com.au Quarterly Commercial Property Update, authored by senior economist Anne Flaherty, shows transaction activity has pulled back following last year's recovery, weighed down by higher borrowing costs, rising unemployment, and geopolitical uncertainty stemming from the Middle East conflict. At the same time, the report identifies a clear opportunity opening up through the budget's residential property tax changes.
Flaherty framed the situation plainly: "The commercial property market has had a subdued start to 2026 following a rebound in growth in 2025. Higher borrowing costs and a softer economic backdrop are making investors more cautious, even as elevated stock levels mean there is still plenty of opportunity for buyers."
The removal of negative gearing on established residential properties and the restructuring of the capital gains tax discount have materially reduced residential investment's appeal for many buyers. Commercial property, by contrast, retains full negative gearing benefits — a distinction the report describes as a structural advantage that could draw investors who are reassessing their portfolios in light of the new rules.
"The 2026 federal budget has also introduced significant changes for residential investment, which could encourage some investors to explore commercial property," Flaherty said.
For brokers, investor clients cooling on residential under the new tax settings may still be active commercial buyers — a conversation worth having now. The timing is significant: brokers now write a record 81% of residential home loans, according to June MFAA data, yet commercial penetration remains far lower — a gap that represents real diversification upside.
The sector picture is uneven. Medical and consulting properties led for-sale listing growth in Q1 2026, up 16% year-on-year, followed by industrial and warehouse at 8% and retail at 6%. Industrial is the standout asset class for brokers with investor clients to watch. It was the only sector to record yield compression across every capital city over both the quarter and the year to March 2026 — meaning values are rising relative to income across the board.
That consistent yield movement, supported by e-commerce growth, tight land supply, and supply chain disruptions lifting warehouse demand, points to sustained investor appetite and stronger serviceability fundamentals for commercial loans in this segment.
Office vacancy tells a more cautionary tale for lenders. National CBD vacancy reached 14.8% in January 2026 — the highest in over 30 years — with Melbourne the hardest hit, climbing nearly sixfold from 3.2% in January 2020 to 19.0% in January 2026.
Retail, by contrast, surprised on transaction volumes, with sales 19% higher in the March quarter year-on-year, driven by major shopping centre deals — a sign that institutional confidence in well-located retail assets has not evaporated despite cost-of-living headwinds.
The second half of 2026 is unlikely to deliver a broad-based commercial recovery. Elevated rates and slowing conditions will continue to weigh on sentiment and borrowing capacity, and buy and lease searches on realcommercial.com.au have softened since late 2025 as business confidence has retreated.
But the report is clear that selective opportunity remains, particularly in sectors with defensive characteristics such as healthcare, childcare, and essential retail.
"Market performance will depend on how competing forces play out,” Flaherty said. “Elevated interest rates and slowing economic conditions are likely to keep weighing on activity, while high stock levels, resilience in key sectors and the relative attractiveness of commercial property following the federal budget help to support demand."
For brokers yet to build a commercial lending panel, the combination of record residential market share and a budget-driven shift in investor behaviour makes the case for diversification harder to ignore than it has been in years.
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