The commercial property landscape across Australia and New Zealand in 2025 revealed a market splitting into distinct winners and losers, with office properties struggling while industrial and logistics assets remained in strong demand.

Sydney and Melbourne CBD office markets faced their most challenging conditions since the early 1990s recession. Vacancy rates in both cities exceeded 15%, with Sydney reaching 16.2% and Melbourne 17.8% by end-2025. These levels haven’t been seen in decades and reflect structural shifts in workplace patterns rather than just cyclical weakness.

The combination of work-from-home arrangements becoming permanent for many organisations, companies reducing their space per employee through hot-desking arrangements, and limited new leasing activity created a perfect storm for office landlords. Rental rates for B and C-grade office buildings declined 8-12% during the year in both cities.

Prime office assets in sought-after locations held up better, with vacancy rates in trophy buildings remaining below 8%. However, even premium landlords needed to offer incentives and fitout contributions to attract tenants. The bifurcation between prime and secondary office assets became more pronounced than in any previous cycle.

Brisbane’s office market showed more resilience with vacancy rates around 12%, still elevated but better than Sydney or Melbourne. The Queensland capital benefits from ongoing population growth and a less pronounced shift to remote work in its key industries. However, rental growth was essentially flat even in Brisbane.

Perth’s office market actually improved during 2025, with vacancy rates declining to around 11% from 14% in 2024. The resource sector strength supported office demand, while limited new supply coming online helped tighten the market. Perth represented the only major Australian office market with positive momentum.

New Zealand’s office markets faced similar pressures to Australian cities. Auckland CBD vacancy exceeded 14%, while Wellington reached an extraordinary 18.5% as government agencies reduced their space requirements. Christchurch’s post-earthquake office market showed more stability at around 9% vacancy.

In stark contrast to office struggles, industrial and logistics properties thrived in 2025. Vacancy rates for quality warehouse and distribution facilities remained below 2% nationally in Australia, with prime logistics assets in some markets essentially fully leased. Rental growth for industrial properties exceeded 8% nationally, with some high-demand locations seeing double-digit increases.

The e-commerce growth trend continues driving demand for logistics facilities near population centres. The shift toward faster delivery times requires distribution networks with facilities closer to end customers rather than centralised warehouses, supporting demand across multiple locations.

Cold storage facilities saw particularly strong demand in 2025 as the food distribution sector adapted to changing consumer behaviour. Purpose-built cold storage warehouses achieved rental growth exceeding 12% in some markets, while vacancy remained essentially zero for quality assets.

Land values for industrial-zoned properties increased substantially in 2025, particularly in the outer suburbs of major cities where new warehouse developments are feasible. Developers report that securing appropriately zoned industrial land has become the primary constraint on new supply rather than construction capacity or financing.

Retail property showed mixed performance across different segments. Neighbourhood shopping centres anchored by supermarkets performed well, with vacancy rates below 3% and rental growth around 4%. These convenience-focused centres benefit from defensive tenant demand and limited new supply.

Large regional shopping centres struggled more, with non-anchor tenancy vacancy rising to around 8-10% in some centres. The shift to online retail continues pressuring traditional mall retailers, though the rate of change has slowed from the rapid shifts seen in 2020-2021.

Investment yields across commercial property sectors diverged significantly in 2025. Prime industrial assets traded at cap rates around 4.5-5.0%, reflecting strong investor demand and low risk profiles. Secondary office buildings in challenged markets saw cap rates drift above 7.5%, reflecting the risk and uncertainty around those assets.

The investment transaction volume for commercial property declined approximately 25% in 2025 compared to 2024. Higher interest rates, economic uncertainty, and valuation disagreements between buyers and sellers all contributed to reduced transaction activity. Properties that did trade generally involved motivated sellers accepting lower prices than they would have hoped for 12-18 months earlier.

Offshore investment in Australian commercial property slowed markedly in 2025. International investors, particularly from Asia and North America, became more cautious about the Australian market given currency movements and economic conditions. Domestic institutional investors and private buyers dominated the limited transaction activity that occurred.

Development activity for commercial property was highly selective in 2025. Industrial and logistics development continued strongly, with multiple large-scale projects underway in all major cities. Office development was essentially frozen, with several planned projects deferred indefinitely. Retail development was limited to specific opportunity-driven projects rather than broad sector expansion.

Valuations for office buildings declined 10-15% on average during 2025, though the impact varied dramatically by building quality and location. Some secondary assets in outer suburban locations experienced 20%+ valuation declines. Industrial property valuations increased modestly, perhaps 3-5%, though primarily driven by rental growth rather than cap rate compression.

The debt financing environment for commercial property tightened during 2025. Banks reduced loan-to-value ratios for office property, requiring larger equity contributions from investors. Debt servicing costs increased as interest rates remained elevated, putting pressure on highly leveraged property investors.

Several commercial property funds gated redemptions during 2025 as valuation uncertainty and limited transaction liquidity made it difficult to meet investor withdrawal requests at stated unit prices. These gating events generally occurred for unlisted funds with significant office exposure rather than industrial-focused funds.

Looking at specific transactions, one of the year’s largest was the $580 million sale of a prime Sydney logistics portfolio to a domestic superannuation fund. This demonstrated that quality industrial assets could still attract strong buyer interest and achieve competitive pricing. Meanwhile, several office buildings that traded did so at prices 30-40% below their 2021 peak valuations.

The outlook for 2026 doesn’t suggest major shifts in these sector dynamics. Office vacancy is likely to remain elevated as companies continue adjusting to hybrid work models. Industrial demand should stay strong driven by structural logistics trends. Retail will likely continue its slow evolution rather than face dramatic shifts.

What 2025 made clear is that commercial property can no longer be viewed as a single asset class. The performance divergence across office, industrial, and retail is so extreme that sector selection matters far more than market timing or general economic conditions. Investors who correctly anticipated these sector trends performed well, while those overweight office properties faced challenging outcomes.