Retail sector to lead as office market diverges: 2025 commercial property predictions
- Written by: Sebastian Holloman
- Yes
Ray White’s Property Outlook Report 2025 has revealed that the commercial property market will continue to evolve in the coming year, presenting investors and property owners with a range of opportunities and challenges.
Drawing on these projections, Ray White head of research Vanessa Rader has issued three top predictions for 2025 across Australia’s commercial property market:
Retail positioned to lead commercial property
Rader commented that retail property is set to emerge as the standout performer for 2025, signalling a notable shift from the dominance of industrial assets in commercial property markets over the recent years.
Recent data has indicated that retail assets have already begun to surge, topping total returns for two consecutive quarters while registering a 2.8 per cent total gain in the latest results, with secondary assets reporting stronger income returns than prime properties.
In contrast, Rader noted that this rebound has coincided with a moderation in industrial sales, which previously accounted for 60 per cent of deals in 2023, but have since eased to 50 per cent.
While the retail sector has performed particularly well in metropolitan markets, with assets outperforming their regional counterparts, neighbourhood and subregional centres showed marked resilience when supported by a strong retail mix, with food, supermarkets and service-based assets driving consumer spending.
As a result of the retail property sector’s enduring ability to adapt and evolve to changing consumer and investor sentiment, Rader highlighted that investor attention has pivoted towards retail assets, and positioned it as the “commercial property sector to watch in 2025”.
The decline of the secondary office market
The report showed that the structural shift to premium office assets has accelerated across Australia’s major office markets, and left the secondary market at a “critical crossroad”.
This shift, resulting from changing tenant demands and greater environmental, social and governance (ESG) pressures, was said to have created an “unprecedented challenge for B-grade and lower quality assets”, many of which were noted as facing “potential obsolescence without significant capital investment”.
If future take-up of office space resembles the state of the market in the post-pandemic era, the report noted that vacancies for secondary assets across all Australian markets will rise from the current level of 15.9 per cent to 22 per cent over the next five years, even considering the consistent withdrawal of stock.
Nevertheless, prime markets are projected to continue thriving, with vacancies expected to ease from the current 13.7 per cent to 5.4 per cent by late 2029, opening up potential for new developments.
Through this market sentiment, Rader noted that the secondary office sector is at a turning point, with buildings which are unable to meet rising environmental standards and tenant expectations running the risk of becoming “stranded assets”.
“The market is likely to see an increase in opportunistic investors targeting these assets for conversion or redevelopment, particularly in locations where alternative uses can unlock greater value,” Rader said.
“For secondary assets without viable conversion potential, the future appears increasingly challenging as the pivot to premium reshapes Australia’s office landscape.”
Private investors bolster the commercial property market
Rader commented that the broader commercial property market is set for a “dynamic shift in 2025”, highlighting that expected interest rate reductions next year are anticipated to “reignite transaction activity across all sectors”.
As a result of the improved debt serviceability and renewed sentiment which would be gained through the change to monetary policy, the report said that this would create a “more favourable environment for leveraged buyers”, which could potentially generate increased competition for quality assets as debt costs moderate.
In such a market landscape, Rader highlighted that “private capital’s agility and ability to move quickly on opportunities will become increasingly valuable as the market transitions to a more favourable lending environment”.
“Lower debt costs, combined with stabilising values, should create favourable conditions for private investors to acquire assets with strong underlying fundamentals,” she said.
For this reason, Rader shared her viewpoint that “the strategic focus for private investors in 2025 will likely centre on assets offering both defensive income streams and clear repositioning potential, as improved debt serviceability drives renewed competition for quality assets”.
“The ability to execute active management strategies and identify emerging sector opportunities will be key differentiators for successful private investors in the year ahead,” Rader said.