Business Insights | Fundamentals prevail as resilience defies uncertainty

Capital flows, AI and the supply-side forces shaping Australian real estate. 

The first half of 2026 has delivered no shortage of challenges for commercial real estate investors and occupiers. Geopolitical tensions, persistent inflation, higher interest rates and a Federal Budget that reshaped residential investment settings have all contributed to an environment of elevated uncertainty. Yet despite these headwinds, Australian commercial real estate has demonstrated remarkable resilience. 

In the latest edition of CBRE's The House View, Australia & New Zealand CEO Phil Rowland and Head of Research Sameer Chopra examine why markets continue to outperform expectations and why supply and demand fundamentals remain the most important drivers of real estate performance. 

Resilience remains the defining story of 2026 

Investment activity increased approximately 20% year-on-year during the first half of 2026, while leasing demand remained robust in key office markets, particularly Sydney and Brisbane. Cap rates were broadly stable, and rental growth continued to surprise on the upside across several sectors. 
Phil says the market’s performance has been a reminder of the sector’s resilience, noting: “Despite all these headwinds we have seen investment activity in Australia rebound YoY by 20%, leasing activity has been strong, particularly in prime office in Sydney and Brisbane. So, what’s my conclusion to all of this? Two things: fundamentals matter and supply matters.”   Historical experience supports this view. While geopolitical events can create short-term volatility, property performance tends to be driven by underlying supply and demand dynamics, employment growth, and occupier needs. 

The TINA era takes hold 

One of CBRE's strongest convictions entering 2026 was the emergence of what Sameer describes as the "TINA" era, where "There Is No Alternative" to quality real estate.  As development pipelines continue to contract, access to high-quality assets in prime locations is becoming increasingly scarce.  In logistics, demand continues to concentrate around newer facilities with the power capacity and infrastructure required to support automation and emerging technologies. Similar patterns are emerging across office markets, where premium assets continue to outperform in leasing activity and rental growth. 

Rental growth continues to surprise 

CBD office rents rose year-on-year in Sydney and Brisbane: 

• CBD office net effective rent growth: ~16% YoY 
• Sydney CBD office rent growth: ~9% YoY 

Both markets continue to benefit from limited new supply and strong tenant demand for prime space. 

At the same time, cap rates have remained more stable than anticipated. Earlier forecasts assumed some outward movement in response to higher bond yields and interest rates, but market pricing has proven more resilient, particularly for well-located, institutional-grade assets. Retail centres were among the strongest performers, with shopping centre cap rates tightening modestly during the quarter. 

Could the Federal Budget unlock new capital? 

The Federal Budget introduced significant changes affecting residential investors, including adjustments to capital gains tax treatment, trust structures and negative gearing arrangements. These reforms may have broader implications for commercial real estate. 

CBRE’s analysis suggests the changes could redirect billions of dollars of capital towards commercial property over time as investors seek alternative opportunities outside the residential market. Sameer says this could be material, noting: “There’s potentially an extra $5 billion per annum of incremental demand for commercial real estate, and that’s a big number. If you consider that the total amount of transaction activity in commercial real estate currently is around $35 billion a year, so it’s a potential 15% uplift in deal flow.” 

While commercial property remains less accessible to retail investors than residential assets, the shift presents a significant opportunity for innovation across private wealth and investment platforms. Early signs of this trend are already emerging, with strong demand for quality assets in the sub-$5 million price bracket. 

AI is creating demand, not destroying it 

Artificial intelligence continues to dominate conversations across the property industry, particularly around its potential impact on office demand. 

However, current market evidence points to expansion rather than contraction. Sameer says CBRE has reviewed a series of major occupier requirements in the legal and financial services sector and found that “each of these clients was looking to expand, typically by taking another floor”, with a similar pattern emerging in the US where “law and Technology firms [are] looking to take up more space.” Phil framed the issue as one still grounded in present-day evidence rather than speculation, asking: “Will AI disrupt the office sector? Who knows – I can’t see into the future. But… why don’t we start with some facts and data points that we can see today.” 

International trends tell a similar story. Major office markets such as Manhattan and San Francisco recorded positive net absorption during the second quarter, while hiring intentions across Australian white-collar industries remain significantly above pre-pandemic levels. 

Sameer argues that previous technological revolutions, including the internet and smartphones, ultimately increased the share of employment in office-using sectors by creating more productive work. AI appears likely to follow a similar path, driving growth in high-value industries rather than eliminating demand for office space.

Supply constraints remain the critical long-term theme 

While near-term headlines continue to focus on interest rates and economic uncertainty, CBRE believes supply-side challenges will be the defining force shaping real estate performance over the remainder of the decade. 

Construction cost pressures remain highly variable, with Brisbane, Perth and Adelaide seeing stronger increases than Sydney and Melbourne. Elevated development and financing costs continue to push economic rents higher across all sectors. 

CBRE’s analysis suggests projects commencing later in the decade will require rents to rise 6% to 8% above trend simply to offset increased construction and funding costs. Sameer says: “Rents need to increase above trend just to offset the cost of construction,” adding that rents “definitely can track above trend for a few years, particularly [where] the occupier or tenant also has good income growth.” As Phil observes, this makes supply-side constraints one of the most important forces shaping the market: “Fundamentals will continue to be shaped by these added supply-side constraints.” 

Looking ahead 

As the second half of 2026 unfolds, CBRE expects occupier demand to remain positive across industrial and office sectors, supported by employment growth and ongoing business expansion. Sameer’s predictions for the second half include “positive net absorption in the Industrial and Office sector”, “incentives falling for prime and well-located stock” and the potential for “a couple of large portfolio deals and potentially increased capital raising.” Phil adds that there is “a good case to be optimistic on occupier activity in the second half,” while noting that investment momentum will depend heavily on “the quality of product given how selective capital is right now.”