Kathryn House
Hello, and welcome to our quarterly Talking Property series, The House View. Together, CBRE's Australia and New Zealand CEO, Phil Rowland, and head of research, Sameer Chopra, investigate what's next for the Australian property sector, the potential disruptors, emerging opportunities, and what's top of mind for the industry's major players. We hope you enjoy their conversation.
Phil Rowland
Hello. I'm Phil Rowland, and it is great to be back with CBRE's Head of Research, Sameer Chopra, for our third edition of the House View for 2026. When we recorded our last podcast back in April, we were right in the thick of the Middle East conflict, and we'd seen two rate rises here in Australia. We were essentially in the eye of the storm. Now the conflict remains unresolved, and many of the associated risks and uncertainties that we were facing in April are still valid. The prospects of an extended conflict dragging down economic growth, sticky inflation, construction cost escalations, and interest rate hikes are all still lurking. And, of course, you can throw in this mix the Federal Budget announced in May. So a lot to deal within the first half of the year. Yeah. Sameer, when I think about this, I contrast it with the results and indicators that we're seeing. And I think this is a great reminder about the resilience we've been seeing throughout the year. You know, it's talked about a lot. It's been a real surprise about how well the global and the Australian economy has held up and how resilient demand has been for commercial real estate, particularly in the second quarter. You know, despite all these headwinds, we've seen investment activity in Australia rebound year over year by about 20%. Leasing activity's been strong, particularly in prime office in Sydney and Brisbane, and for that matter, the gateway cities in the US. So, you know, what's my conclusion to all this? Well, the market is behaving the way it has historically behaved during times of geopolitical volatility. That is, you know, the geopolitical events don't directly correlate to a downturn in economic activity. Henry Chin presented a great slide at the Property Leaders Summit in Canberra last month that charts geopolitical events against G7 employment. And if you take the last 15 years, take COVID out of the mix, and you've had the Arab Spring, Brexit, US China trade wars, and Ukraine. No material global economic impact. Therefore, what we're seeing is the market being driven by the fundamentals of supply and demand. Sameer, how do you see it?
Sameer Chopra
Yeah. Phil, look, similar conclusion, particularly the point about fundamentals. Take supply, for example, right now. The significant fall in supply that we're seeing in Australia is also a global theme, and it was one of these anchor points that we made, early this year in our Market Outlook. We called it the TINA era. You know, that is we're entering the part of the cycle where there is no alternative for occupiers and investors, you know, who desire access to quality stock in good quality locations. Actually, Phil, you know, Henry called out logistics as an example. You know, in the US, we're seeing increased tenant activity for modern facilities with access to power and automation. And, you know, these are kind of similar to themes that Sass has been discussing with clients in recent presentations here, that that post 2020, modern, brand new stock is just outperforming in leasing and and rents.
Phil Rowland
Yeah. Yeah. Well, you know, to me, like, it's just a really good reminder about the importance of looking through all the uncertainty and volatility and just staying focused on the fundamentals and taking advantage of these shorter cycles, which we've talked about, which is essentially the new norm now. Okay. Let's get to it, Sameer. Plenty of things that would be good to cover today. It'd be good to start with the Australian economy and just cover some of the main commercial real estate indicators for the second quarter. Let's also cover Federal Budget. You know, will we see a pull through into commercial real estate? The impact of AI is also on everyone's mind. So let's hit that. And I know you have some good data on construction costs. So let's cover that in the context of economic rents alongside the leasing velocity that we're seeing. And then to wrap it up at the end Sameer, let's get your predictions on the second half. So if you're good with that, let's get to the Australian economy. What's your take?
Sameer Chopra
Yeah. Phil, look, in Australia, the market is expecting something between, call it, flat interest rates to perhaps maybe one more hike during the rest of 2026, and then scope for one to two cuts late in 2027. So, you know, and the economy is expected to grow at about one and a half percent. That's broadly in line with where population's growing. And, you know, the way I'd put it is, to use a pun, flat is the new black. But, you know, real estate outcomes are also driven by how fast supply falls away, which kind of helps to boost rents. And that's also, you know Phil, lacking as a catalyst right now for tenants to bring forward their leasing decisions. Right? And so we've been getting more constructive on rent outlook over the last twelve months, and, you know, I'd say my conviction continues to grow.
Phil Rowland
Yeah. Now I'm with you on that. So looking at Q2 results, what surprised you the most?
Sameer Chopra
Yeah. I'd say there's kind of three or four things. Firstly, you know, rents are really starting to outperform in Brisbane and Sydney office. So Brisbane net effective rents Phil are now running at 16% year over year. And in Sydney CBD, they're growing at 9% year over year. So that's very strong growth. Secondly, you know, if you look at capital markets, cap rates were stable. I'd been expecting that they could widen by about 10 to 15bps,mso cap rates have actually behaved better. And then, you know, transaction volumes were much better than expected. Right? And then fourth one, Phil, construction cost rose, but it was a very nuanced picture. They're not increasing much in Melbourne, it's kind of flattish construction cost growth. But Brisbane is accelerating at sort of high single digits. So it's a very nuanced picture.
Phil Rowland
Mhmm. Well, your your point about investment activity, that certainly surprised on the upside.
Sameer Chopra
Yeah. Yeah. Transaction activity for commercial real estate increased 20% in the first half of 2026. And just to kind of provide some perspective around it, I'd been looking for 5% growth, and people were saying I'm the bull, kind of thing. So, you know, it blew right past our numbers.
Phil Rowland
Yeah. Yeah. It did. You know, certainly in our internal numbers too. But it's not a consistent picture across all sectors. Right? You know, retail has been a strong market for a while now, and it's making up a 35% share of of deals compared to 26% over the last 15 years. And industrial saw healthy volumes plus good volumes in Sydney and Brisbane office.
Sameer Chopra
Yeah. Just good liquidity. I think Sydney and Brisbane office supported by that rent growth we just spoke about. But in most other cities, they're still not transacting at the levels that I'd like to see. Hotels was also pretty decent in the first half, Phil. You know, it's a sector where I'd say there's still a large difference in price expectations between buyers and sellers. Most of it's to do with cost of debt. I think cost of debt's one of the big drivers. Yep.
Phil Rowland
And interestingly, the transaction activity is being supported by the resurgence of interest from domestic buyers. So the domestic share of transactions is back up to just over three quarters of all transactions. And of the international investors, North America and Japan, you know, remained the most active segments. What about rents and cap rates across the different sectors, Sameer? What what did we see in the last quarter?
Sameer Chopra
Pretty benign when it comes to cap rate changes. So, you know, cap rates across most sectors and geographies were stable. You know? And, Phil, like I was saying, you know, I'd expected maybe 10 to 25bps of expansion because of what we were seeing in the bond market. But, surprisingly, you know, cap rates were stable in that second quarter. It could also be because a lot of the assets which are trading are in desirable locations. And quite often, it's because of these are culmination of deals which were initiated in late 2025. So, you know, it's stuff that is getting dragged out from last year. We'll see how Q3 tracks with deals that get completed. There could be a case maybe for us to slightly tighten the cap rates in our forecast. Let's just see how it plays out. The exception, by the way, Phil, was, you know, you called out retail, the shopping centres, where cap rates tightened by about, say, five bps. And I'd see office and secondary locations are still sort of widening. Yeah.
Phil Rowland
So broadly stable cap rates with valuations potentially seeing some upside from rent growth. This would suggest that for prime, well, okay, stock, you know, valuations are flat to slightly higher, but there's some downside risk for the stock facing that persistent vacancy. And certainly for some of the retail sector REITs that provided early valuation updates, you know, we've seen about a one to two percent valuation uplift. Okay. So while we're on valuations, let's talk about the Federal Budget, Sameer. What was your take on its impact on commercial real estate? You know, it was largely designed to spur residential supply. But do you think that in reality, this is going to divert investment into the commercial sector, particularly for private investors?
Sameer Chopra
Yeah. Phil, look, I think that's a real possibility. You know, the changes to the capital gains tax, trust structures, and negative gearing should see greater flow into commercial real estate. We did some back of the envelope calculations, and it suggests that, you know, 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, you know, the total amount of transaction activity in commercial real estate currently is around $35 bill a year, so it's a potential 15% uplift in deal flow. But this won't be easy. You know, the commercial real estate sector has very few options for retail investors, you know, the mum and dad types. Typically, who might wanna have a look at commercial assets, there's only a handful of funds that directly market to these retail type investors. Whereas, you know, Phil, it's very easy for an individual to access buying a residential investment property. So I think this will be a place where we'll see good innovation in the sector. You know, how do you tap into this growing volume of retail investor who's now maybe not as passionate about investing in residential?
Phil Rowland
Yeah. But so just coming back to that number, Sameer, it's a big one. What's what's the math behind the $5 billion?
Sameer Chopra
Yeah. Look. It's back of the envelope. Now I'd say, you know, couple of things. One, there's around 200,000 investors in Australia each year who participate in acquiring a residential real estate. And about 83% of these have typically bought an existing dwelling. And we assume around 33 to 50,000 of these, you know, may now opt not to go into residential because of the negative gearing changes. So, you know, by the way, this equates to about a 10% drag on residential transaction volumes over the long term. We also assume that, you know, just half of the money that's now looking for new investment opportunities gets deployed into commercial property. The other 50%, you know, could get deployed into stock market or private credit. You add all that up, you get to that sort of $5 bill number, and, you know, I think it should give a good tailwind for private wealth businesses.
Phil Rowland
Yeah. Well, you know, we're already seeing some of that come through in our numbers. Our June auctions, we traded about $80 million, and this was up on May's volume of about $57 million. But off the pace a little bit when you compare to the average of nearly $100 mil across, February and March. So while the budget introduced capital gains tax uncertainty, higher interest rates were also impacting on sentiment.
Sameer Chopra
Yeah. You know, for investors who might have bought, you know, say, a quick service restaurant or a childcare site in 2021, 22, so just after COVID. You know, many of these assets are now coming up for refinance. And five years ago, you know, the cost of debt for some of these assets would have been in that three and a half to four and a half percent type range. But now refinancing is possibly six to seven percent sort of range. So, you know, if you do some rough maths, let's say you've got a $5 million dollar asset, there's an incremental 25,000 per year interest cost drag during this refinance, and most of that's happened just in the past six to 12 months compared to, say, five years ago.
Phil Rowland
Yeah. I think we saw that in sort of slightly softer buyer debt, particularly in May, you know, with just 52 registered bidders for our auction. But June saw an increase to 100, you know, better, but still below the numbers we were seeing in December last year when interest rates were lower. Pleasingly, clearance rates on our Private Wealth platform are running at just over 80%. So stock, which is put on the market, is selling.
Sameer Chopra
Yeah. Look. And I spoke with, Ingrid Filmer, who runs our Private Wealth business, and she mentioned that the greatest level of interest we're seeing currently is in that sub $5 million price bracket for quality stock. And, you know, this segment is the one that's kind of benefiting from investors who might have, say, previously considered residential options, but now they're starting to tilt into the commercial space. And, you know, pricing and cap rates and yields for the better quality stock just seems to be holding up, but it becomes a bit more challenging the higher up the price point you go.
Phil Rowland
Yeah. Some really interesting dynamics that sort of gonna play out off the Federal Budget, so lots to watch there. Look. The other big topic of discussion, of course, is AI. You know, we're all trying to decipher what the future looks like in an AI-enabled world. Not to mention the economic feasibility of the immense levels of investment that are pouring into the sector. But just coming back to the main question for commercial property. You know, will AI disrupt the office sector? Right? So who knows? You know, I can't see into the future. But, Sameer, why don't we start with some of the facts and the data points that we can see today? And that might just frame some of our thinking about the future.
Sameer Chopra
Yeah, Phil. So, you know, you and I were chatting about this earlier. We looked at seven deals that have occurred recently, or where we have an active brief in the market, and these are larger clients in the law and finance space in Australia. And each of these clients was looking to expand, and typically by taking another floor and, in some cases, two floors. And it's a similar theme to what, you know, many of our leasing agents have been calling out in the US with law and tech firms looking to take up more space. And just to put some data around it, Phil, you know, by way of example, in Manhattan, office net absorption was +280,000 square metres in the second quarter, and even San Francisco saw positive net absorption of 90,000 square metres in that second quarter. And, you know, where you can see in both of these cities continues to trend down in both cities. And maybe just to throw another stat, you know, I was looking at job vacancies in Australia for, white collar workers. And in, May 2026, there was 96,000 job vacancies. And if you scroll back to, you know, pre COVID, for the five years pre COVID, it averaged about 70,000. So 70,000 has gone to 96,000, so much bigger hiring intention. I'd say hiring intentions are 35% higher today compared to sort of pre COVID.
Phil Rowland
Oh, yeah. Well, you know, there's some interesting sort of here and now stats and and a few anecdotes that support the view that this is not a destruction of demand. Right? It's you know, what we're seeing is quite the contrary. So if we extend this, you know, what can we decipher from previous technology innovations? You know? So did these innovations that we've seen in the last ten, 20 years, you know, did they create more office jobs?
Sameer Chopra
Yeah. Look, Phil, we were just looking at this, and our analysis shows that, you know, following the Internet and the smartphone boom, technologies that generated, you know, quite remarkable fears at the time of white collar displacement, office using employment actually saw its largest gains in terms of share of overall employment, since at least 1990. And the reason is structural. Right? Work created by new technology is more productive than the work it displaces. In an office using industries already generate output per employee that's kind of more than twice the national average. You know, and that productivity premium has been kind of widening even as broader productivity in markets like Australia is kind of, you know, where growth has stalled. And so, you know, as AI drives the next productivity boom, it'll do what prior tech shifts always did. It'll push some labour towards the most productive sectors in the economy, which typically skew towards office using. Maybe I'll use an example here, Phil. From, I was speaking with a partner at a law firm. This is a firm that's extensively using AI. And the math is the revenue in the firm equals the number of jobs multiplied by the time per job, multiplied by the average hourly rate, kind of three components to the revenue. And what he was telling us is that the number of jobs is increasing. And in fact, you know, AI is driving a lot of jobs into that law firm. The rate card is also increasing while the time to complete the job is declining because AI is driving that sort of productivity. Overall, you know, what they're experiencing is higher revenue, and they're still looking at expanding the size of their practice just to kind of bring it.
Phil Rowland
That's exactly what you're saying about pushing it towards those higher productive parts of the sector. And as this occurs, I suppose it would seem, certainly based on what we're seeing now, that this translates into a continued focus on high quality space in the right location to get after the best talent. And as you've highlighted, you know, this comes at a time when there are fewer options like this available going forward.
Sameer Chopra
Yeah. Look. The supply crunch is kind of underway. And in office, it starts in 2026 and extends all the way out into 2030 and maybe even early 2030's. So yeah.
Phil Rowland
Alright. Supply. It's a good segue to, construction costs. So last time around, you were saying that the Middle East issues, will cause construction costs to rise, driving down supply. Any change in that view?
Sameer Chopra
Yeah. Look. Construction is very nuanced right now. I've had a chance to speak to a lot of people in the industry recently. You know? And what they're telling us is that it's cheaper to add supply if the asset already has earthworks done, but it's more expensive when earthworks are required, and that's, you know, diesel pricing. It's more expensive for high rise, more modest if it's kind of low rise or single family homes, and there's more price and supply certainty, you know, if you're sourcing domestically compared to if you have to import the kind of material. So there's a few things kind of moving there. And then Melbourne and then to some extent Sydney are at the lower end of that construction cost growth, and Brisbane, Perth, and Adelaide are much higher. Adelaide's probably more in the middle. And there's some uncertainty, you know, associated also right now created by this fall off in the residential pipeline because of this budget. On the flip side, there's very healthy demand coming through from data centre clients. And so a couple of other things, you know, construction firms are keeping an eye on the roll off of infrastructure projects. They're trying to secure new commercial pipeline. Number of construction projects, Phil, now are just in the final stages or they've just completed. You know, if you look at Western Sydney Airport or the West Gate Tunnel in Melbourne. And so the crews here now, you know, looking for new work. They're keen.
Phil Rowland
But other projects like AUKUS and Brisbane Olympics are still very early stage. So Adelaide, Brisbane, Perth could still see an extended period of of higher construction demand. But previously, you were saying our forecast assumes six and a half percent per annum in construction cost growth out to 2030. How do you see this playing out now?
Sameer Chopra
Yeah. Look. I'd still take a cautious view on construction cost and kind of bake that into economic rents for preleasing. But maybe we don't end up at six and a half percent per annum. Something closer to, say, five percent, but with larger variances around the cities. So, you know, Melbourne and Sydney is sort of thing, you know, bit below that five percent. Adelaide, Brisbane, Perth, you know, above those five percent type levels. You know, and with the step up in construction cost and, just these persistently higher interest costs, you know, I'd still be assuming that economic rents that are needed for projects later on in the decade have increased by six to eight percent as we travel through this year. Put another way, Phil, you know, I'd say rents need to increase above trend just to offset the cost of construction.
Phil Rowland
So this is a very tough prediction Sameer, so forgive me, but what's your view about the ability for rents to track above trend as you just talked about? Right? So given the leasing velocity that we're seeing right now and and that sort of macro outlook, you know, including that AI-driven productivity that that we just talked about. Do you think the gap we're seeing today against economic rents could narrow?
Sameer Chopra
Rents, Phil, I'd say, definitely can track above trend for a few years, particularly the occupier or tenant also has good income growth. But if businesses and households start to see revenue and income stagnate, then, you know, they'll inevitably start to look for cheaper options. I think it'll be important to warm up the market to expect this above trend rent growth because if you expect it, you're more likely to accept it.
Phil Rowland
Yeah. Yeah. A bit of conditioning, Sameer. Alright. Well, to wrap things up, let's quickly get through your predictions for the second half. What are your top three to four picks, Sameer?
Sameer Chopra
Phil, I have four predictions for the second half. One is, you know, we're expecting positive net absorption in the second half in industrial and office sector. I think occupiers will continue to sort of push through. And just in that way, you know, incentives should start to fall for prime relocated stock. I would expect the scope for a couple of large portfolio deals. Phil, we spoke about this previously, and maybe even potentially increase capital raising. And then I'll throw in a controversial one because I always do. You know, I think residential values will start to stabilise and reaccelerate back into this year just following the high rents.
Phil Rowland
Alright. Well, that last one is a good one to come back to. I agree with you on the first two points, by the way. I think there's a really good case to be optimistic on on occupier activity in the second half. On investment activity and capital flows, I I think that's gonna be very dependent on the quality of products given how selective we've seen capital be right now, but let's see. Alright. Well, I think that wraps us up. Thank you, Sameer, as always. And to our listeners, I hope you enjoyed this latest edition of the House View. As always, please send us any questions that you might have via
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