The Ray White Property Outlook Report 2025
As we head into 2025, the Australian commercial property market continues to evolve. From shifting market dynamics to new leading asset classes, next year presents both exciting opportunities and complex challenges for property owners, investors, and industry participants alike.
Ray White head of research Vanessa Rader has identified their top predictions for 2025 across Australia's commercial property market.
Prediction 1: Retail set to lead commercial property
Prediction 2: The death of the secondary office market
Prediction 3: Private investors to prop up the commercial market for another year
Retail property is positioning itself as the standout performer for 2025, marking a significant shift from recent years where industrial assets dominated commercial property markets. Recent data shows retail assets have already begun this ascent, leading total returns for two consecutive quarters and posting a 2.8 per cent total gain in the latest results.
This rebound in retail property is particularly evident in transaction volumes, with retail now representing 41.1 per cent of all commercial transaction numbers in late 2024; a remarkable increase from its long-term average of 28 per cent. This surge comes as industrial sales, which dominated at 60 per cent of deals in 2023, have moderated to 50 per cent.
Despite ongoing discussion about the threat of online retail, physical stores have shown remarkable resilience. Online spending accounts for just 11.4 per cent of total retail transactions and has remained relatively stable over recent years. While certain categories like clothing and homewares have embraced e-commerce, and events like Black Friday drive online spikes, brick-and-mortar retail continues to demonstrate its enduring appeal.
The sector's strength is particularly evident in metropolitan markets, where assets have outperformed their regional counterparts. Notably, secondary assets have surprised by yielding stronger income returns than prime properties. Neighbourhood and sub-regional centres have proven especially resilient when anchored by the right retail mix, with food, supermarkets, and services driving consumer spending.
Looking ahead, several factors support retail's positive outlook. Limited new supply against strong population growth has driven improved occupancy and rental performance in select markets. The retail landscape is also evolving, with entertainment offerings likely to emerge as a key component of successful centres, creating lifestyle destinations rather than pure shopping venues.
However, the sector faces some headwinds. The growing influence of social media marketplaces, with Facebook Marketplace activity growing 3.6 per cent annually, and Australia's ageing demographic could reshape retail demands over the next two decades. These changes suggest successful retail assets will need to adapt to changing consumer preferences and needs.
As we move into 2025, while industrial assets remain an essential part of the retail ecosystem, investor attention is clearly pivoting towards retail assets. The sector's ability to adapt and evolve, combining traditional brick-and-mortar retail with emerging entertainment offerings and online integration, positions it as the commercial property sector to watch in 2025.
The secondary office market is facing a critical crossroad as the pivot to premium accelerates across Australia's major office markets. This structural shift, driven by evolving tenant demands and intensifying environmental, social and governance (ESG) pressures, is creating an unprecedented challenge for B-grade and lower quality assets, with many facing potential obsolescence without significant capital investment.
Corporate Australia's focus on workplace experience and sustainability credentials has transformed from a 'nice-to-have' into a non-negotiable requirement. Major tenants are increasingly bound by corporate ESG commitments and reporting obligations, forcing their hand in relocating to buildings with superior environmental ratings. This flight from secondary stock has seen vacancy rates in B, C and D-grade assets push beyond 20 per cent in several submarkets, while prime-grade vacancies are slowly improving.
If future take up of space echoes results seen in the post pandemic era, vacancies for secondary assets across all Australian markets will reach 22 per cent (from current 15.9 per cent) in the next five years, even considering consistent withdrawal of stock. Prime markets however will continue to thrive, vacancies will move downward from the current 13.7 per cent to 5.4 per cent by late 2029, opening up potential for new development.
Further compounding this issue is the capital expenditure required to bring older assets up to modern standards. Basic refurbishments no longer suffice – tenants demand end-of-trip facilities, sophisticated air conditioning systems, smart building technology, and high NABERS ratings. Given the high cost of upgrades in the current market, this cost may not be recoverable through rental uplift in the current market.
The financing landscape further stresses these challenges. Lenders are increasingly cautious about exposure to secondary assets, particularly those with significant vacancy or requiring substantial capital expenditure. This credit squeeze is forcing some owners to consider alternative uses, with conversion to residential or mixed-use becoming an increasingly attractive option in markets where planning regulations permit.
Our forecasts suggest the chasmbifurcation between prime and secondary assets is expected to widen further as the market's pivot to premium continues. While premium grade assets benefit from competitive tension among blue-chip tenants willing to pay for quality, secondary assets face a shrinking tenant pool and declining rents. This dynamic is particularly evident in suburban markets, where the lack of scale often makes substantial upgrades economically unviable.
Therefore, the secondary office sector faces a turning point. Buildings unable to meet rising environmental standards and tenant expectations risk 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. For secondary assets without viable conversion potential, the future appears increasingly challenging as the pivot to premium reshapes Australia's office landscape.
The commercial property market is poised for a dynamic shift in 2025, with anticipated interest rate reductions expected to reignite transaction activity across all sectors. Private investors, armed with improved debt serviceability and renewed confidence, are likely to lead this resurgence. The expected easing of monetary policy should create a more favourable environment for leveraged buyers, potentially driving increased competition for quality assets as debt costs moderate.
The retail sector's rebound is expected to gain further momentum in 2025, with private investors strategically targeting metropolitan assets underpinned by strong trade area demographics and essential service offerings. Neighbourhood centres anchored by supermarkets, combined with healthcare services and daily needs retail, will likely remain highly sought after. The evolving tenant mix towards experiential retail and services is expected to further strengthen the sector's appeal, particularly in assets requiring strategic repositioning to capture changing consumer preferences.
The industrial sector continues to benefit from structural undersupply in key markets. Private investors are increasingly focusing on the smaller end of town such as industrial units and last-mile logistics facilities, particularly those with value-add potential. Owner occupiers will continue to be in competition for these assets with any downside risk limited.
2025 could mark a turning point for the office sector as the market finally adjusts to hybrid working patterns. Metropolitan assets with strong tenant covenants and modern amenities are attracting renewed interest, particularly buildings that have already undergone ESG upgrades. The flight to quality trend is expected to create opportunities for investors willing to reposition B-grade assets in strong locations, especially as occupiers seek better workplace experiences to encourage office attendance.
The smaller ticket alternative sector continues to attract private investor attention, with these assets offering compelling income security through structured rental growth. Childcare centres and service stations, delivering annual rental increases with long lease terms, remain highly sought after by yield-focused investors.
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.
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.
Ray White Group
