Transaction activity across Australia’s commercial capital markets slumped in the first quarter of 2026, as geopolitical uncertainty and shifting interest rate expectations weighed on sentiment.
Volumes dropped to $7.3 billion in Q1 2026, down from $15.3 billion in Q4 2025, according to Knight Frank’s Australian Capital View - May 2026.
Investor caution intensified after the escalation of the Iran conflict in late February, with activity easing through March as buyers reassessed risk and financing conditions.
However, the structural case for investment remains intact, according to Knight Frank Senior Economist, Research & Consulting, Alistair Read.
“Investors remain aware of the bigger picture,” Mr Read said.
“Structural supply constraints are likely to emerge across most asset classes over the coming years, underpinning a compelling medium-to-long-term investment case.”
Retail Leads, Office Holds Ground
Retail dominated activity, accounting for nearly half of all transactions.
The sector led at $3.6 billion, followed by office at $2.1 billion and industrial at $1.2 billion.
Office markets are benefiting from a tightening supply pipeline, with prime rental growth strengthening across Brisbane, Sydney and Adelaide CBDs, supporting the sector’s income outlook.
“Retail’s recovery has been more complete than many expected, with the sector recording the strongest average total return at 9.9% over the year to Q1 2026,” he said.
“Prime office is at an earlier stage of that recovery, but strong effective rent growth in core CBD precincts is giving investors increasing confidence that the income case is strengthening.”
Rate Rises Hit Differently
The renewed cycle of interest rate rises has unsettled some investors, with the 2022-23 period still fresh in memory.
But Mr Read said the comparison only goes so far.
Valuations have already reset, and the recovery that gained momentum through 2025 had yet to broaden beyond core markets, meaning pricing carries less downside risk than in the previous cycle.
Occupier markets in office and retail are also stronger, underpinned by a lack of new supply.
“In 2022-23, rate rises hit a market where valuations were still stretched, and occupier conditions were fragile - you had two headwinds compounding each other,” he said.
“Today the repricing cycle has largely run its course, so the valuation buffer is meaningfully better, and the income side of the equation is strengthening rather than deteriorating.”
Super Funds Return to Market
Institutional investors accounted for 42% of Q1 volumes, followed by public capital at 23%, and cross-border and private capital at 16% each.
The key shift is the return of Australia’s superannuation funds to direct acquisitions.
After years of largely maintaining portfolios, major funds have re-entered the market over the past 12 months, deploying capital across all sectors, with living assets a particular focus.
“Superannuation funds have a multi-decade investment horizon and an obligation to deploy capital,” he said.
“Over the past 12 months, many funds have opted to deploy capital directly, acquiring large assets across all sectors, which is a strong signal that they see current pricing as an attractive entry point rather than a risk.”
Near-Term Caution, Long-Term Conviction
Higher funding costs and global uncertainty are expected to weigh on transaction volumes in the coming months.
But Knight Frank’s research points to a market where demand for quality assets remains firm, and medium-to-long-term fundamentals continue to support activity.
“Near-term transaction activity may remain tempered as buyers reassess return hurdles against a higher borrowing cost environment, however this caution needs to be distinguished from a broader loss of conviction in Australian commercial property,” he said.
“Improving rental growth prospects and a severely constrained development pipeline across most sectors provide a solid foundation for transaction activity to persist through the remainder of 2026.”
