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 final edition of the House View for 2026. And what a year it's been. Remarkably, from a commercial real estate perspective, we've entered the last quarter of the year in a broadly similar place to where we thought we would at the start of 26'. And this is despite the fresh set of challenges that have been thrown into the mix this year. Higher interest rates, changes to tax policy, and the deepening impacts of an extended conflicts in the Middle East. For the full year 2026, investment volumes are likely to grow year on year by at least single digits. We're seeing positive net absorption in office and accelerating rent growth in that sector. And industrial take up in the first nine months is just 15% below the entire absorption for 2026. So when I think about this, Sameer, and I contrast with the headlines and the indicators that we're seeing, the Global and Australian economy has held up surprisingly well so far. Now no doubt there's been puts and takes, and it is a very challenging environment in some segments. But overall, I would say Australia's commercial real estate sector continues to exhibit resilience primarily because of the fundamentals that are holding up. But I don't want to ignore two themes and risks that are at the forefront of investors and occupiers alike. Firstly, the rapid movement in bond rates and the interest rate trajectory both in Australia and around the world is obviously a real concern. And secondly, AI is shaping many aspects of our economy. It's impacting the way that we work and it's spurring a significant development pipeline in Australia that is 4x its size from a year ago, and it's currently twice as large as that of office. Now I know these topics are getting a lot of commentary right now, but that's for a reason. You know, you could argue that these two forces are the most significant themes impacting the market right now. So let's hit these. So Sameer let's get into it. Let's kick off with interest rates and what we're seeing on yields in Q3.
Sameer Chopra
Yeah. Well, Phil, these, recent interest rate moves have definitely not been good for my nerves. You know, I'm doubling down on my magnesium intake and pilates sessions. Look. There's broad consensus that higher interest rates are being driven by three factors. We've got these persistent budget deficits. We have sticky inflation rates and also sort of bond issuance associated with the Australian data center build out. Aussie bond yields now are into the 5% range. They're up about half a percentage point just in that third quarter. And then, you know, we've also seen the slightly higher credit margins, particularly for real estate in secondary locations. So typically, Phil, this would have seen us expanding our cap rates. But for Q3, what we saw is stable cap rates for prime real estate, all sectors, offset by some expansion in that secondary real estate space. We've seen some yield expansion in parts of the private wealth market, assets which are typically in the $20 - $25 million dollar range, and some cap rate compressions across areas of the, you know, retail sector.
Phil Rowland
So, Sameer, why aren't cap rates expanding for prime assets, or is it just a case of it will come later with a lagged impact? And also, you know, how's it flowing into valuations?
Sameer Chopra
Yeah. Look. I think there are multiple reasons why these, prime cap rates have been more stable across sectors. Firstly, vendors can be more reluctant to sell these assets, whereas they're more likely to alter their portfolios around secondary assets. Secondly, you know, with constrained supply, the prime assets have seen much better than expected rent growth, and there's now good evidence of that occurring. And, you know, we can dig into that shortly. And then thirdly, in some cases, particularly in, the living sector, there's just a dearth of assets available on market. So it's easier to hold a cap rate even though you've got these high bond yields. And for that, I just don't think we have enough leverage in commercial real estate in Australia. We've just done an exercise around this and estimate that leverage across commercial real estate is just 37% of asset value. So that offers some level of insurance or insulation, you know, against rising rates. And on valuations, Phil, you know, what we saw in the first half was that valuations grew by 1% - 4%, supported by rent growth in the face of stable cap rates. From here, you know, I would expect valuations could still be sort of flattish as rent growth offsets any softening in the yields. So, you know, valuations for prime assets, I think they bottomed, in my view. There could be a bit more to give for secondary assets. So, you know, rates are a threat, but fundamentals are currently offsetting them in the prime real estate.
Phil Rowland
Yeah. Absolutely. And that rental growth story in prime assets is a real driver. And, of course, we've seen investment volumes continue to improve as the pipeline of available stock growth.
Sameer Chopra
Yeah. There's, strong evidence that sellers and buyers, I think, just wanna get on with it now. Actually, I was speaking with a colleague, and he was saying, we also just need to be mindful that there might be too many options for buyers to consider, and this can actually slow the pace of deal flow because, demand needs a very selective approach.
Phil Rowland
Yeah. Well, sentiment is clearly being helped by the prospect of much lower supply bringing down vacancy and creating, you know, some urgency in the market. You know, in our numbers, supply for industrial and apartments will be 25% to 30% lower over the next five years compared to the previous ten years, and 40% to 50% lower for hotels, office, and shopping centers. Interestingly, you know, vacancy indicators globally are also moving positively as absorption meets several years of, weak supply. Manhattan office vacancy has fallen by 3% over the last year, and Toronto has moved from 19% vacancy in late 24' to about 13% today.
Sameer Chopra
Yeah. And it's kind of a similar story in logistics. In the last quarter, the UK saw half a percentage point of compression in vacancy. It's down to sort of 6.5%. Sticking with Canada in Montreal, vacancy again compressed by about half a percentage point, 6.3%. The other interesting global theme here, Phil, is in industrial, is demand for newer and larger facilities. So I'll just use Houston by way of example. You know, vacancy for larger lots, these are those that are above 75,000 square meters. Vacancy is just 3.8% compared to market wide vacancy at 6.3%. In fact, our, James Breeze, who's CBRE's Head of US Industrial Research, also mentioned that leasing velocity overall was up 5% in the third quarter compared to last year.
Phil Rowland
Mhmm. Oh, they're good international indicators. So what do we see in rental growth in the third quarter in Australia, Sameer? You know, you mentioned earlier that rents in Brisbane, Perth, and Sydney were strong.
Sameer Chopra
Yeah. Look. The rent picture, Phil, is heavily influenced by direction of travel on, you know, what's going on with incentives. In logistics, we have Perth at plus 10% and Sydney at minus 4% in the third quarter. In Sydney, incentives have increased. You know, they're running at above 22%. In office field, this number blew me away. You know, Brisbane posted 19.8% year over year net effective rent growth. And Sydney core is up plus 10% as incentives are now starting to drop off in both of these markets. In shopping centers, Perth was the strongest, up 7%. And in residential field, you know, as you scan around the cities, they're all doing 4% - 8% type year over year rent growth. And, you know, when I scan the overall market, I'd say, you know, all sectors, all cities, rents are broadly growing at mid single digits with a few exceptions where incentives are coming down off the highs. And I think this falling incentives narrative could be, you know, significant part of our playbook for the coming years.
Phil Rowland
Alright. Well, staying with that demand narrative, the other topic that, we wanna get into, Sameer is AI. And as I said in my introduction, it's a really powerful force that's shaping businesses and industries and the economy overall. From a CBRE perspective, we're investing heavily because we can clearly see the productivity benefits that are emerging. But at the same time, it is important to be balanced. It's significant change management exercise that relies on really high quality data. And in many cases, the ROI is still difficult to quantify precisely. You can feel it intuitively, but that's getting a little bit exasperated too as those AI providers adjust their revenue model. So we can see the opportunity, but there is still plenty of unknowns. So a couple of areas I'd like to explore. Firstly, what evidence are we seeing about the impact on office demand and occupier behavior? And then secondly, you know, what's happening in the data center sector as demand accelerates?
Sameer Chopra
Yeah. You know, what we're seeing in the market right now, I'd say there's a strong case for positive absorption fill. I have a list of around 33 reasonably large office deals and inquiries in 2026 across the tech sector, finance sector, professional services, where clients are, you know, either looking to expand space or looking at co-working space as part of the initial market entry. And just to give you a sense, you know, what we're seeing on the ground, I was also speaking with a large client who's looking to convert some of their collaboration space into desks as headcount growth and activity levels, you know, continue to surprise. If you look at the jobs numbers as well, Phil, the ones that just came out, while many would have expected to see AI and tech related job displacement, what we actually saw is professional services has added 26,000 jobs year over year. Finance has added 13,000 jobs year over year. Retail has added 25,000 jobs year over year. I'd say the demand is defying the narrative, Phil.
Phil Rowland
Yeah. Yeah. Well, I think your point around retail is interesting. I did wanna ask you, what other emerging evidence are we seeing about the impact of AI on retail, on industrial?
Sameer Chopra
Yeah. On industrial, Phil, our, US occupier survey showed that AI is being quite commonly used now in inventory management and forecasting. I would say rather than AI, ecommerce and robotics are bigger tech drivers for the future of industrial take up. I'd also expect the same, by the way, for retail real estate as well.
Phil Rowland
So just shifting away from sort of how it's shaping the demand side, Sameer, how would you characterise the data center market today, which appears to be significantly undersupplied relevant to current and forecast demand? And, also, what are we seeing in terms of capital flows to support this big build out?
Sameer Chopra
Yeah, Phil. I'll just kind of zoom out and look at the global picture. The, inventory of data center stock is increasing rapidly. Our US team had said that they're seeing 33% growth in inventory year over year. In Sydney, specifically, you know, inventory, that's the build stock, is a little bit under 1 gigawatt right now. The other big call out in data center space is, falling vacancy rates. In the main US markets like North Virginia, vacancy rates have fallen from 0.8% to 0.3%, super tight. In Sydney, you know, vacancy is around 4.5%. And both Sydney and Tokyo are markets, you know, in our region with the highest level of absorption, most interest.
Phil Rowland
Well, it's a good perspective, Sameer. You know, it gets clear that AI presents, an enormous opportunity. And I think what you're pointing towards there is the evidence doesn't point to weaker occupier demand. But equally, what we can't overlook is that some of these transitional challenges that it creates, it's clearly creating some inflationary pressure. There's a lot of competition for capital and it is drawing a lot of construction resources. So I'm sure it's a theme that we'll be talking about a lot in the coming years. What I would do want to do now is just switch a little bit to demographics. So let's move the discussion to Australia's structural trends in that regard. So birth rates impact childcare, migration levels impact student accommodation and apartments. And the aging population obviously impacts land lease, retirement villages and aged care. So why don't we start off by setting the scene on what's been happening on each of these themes? And I know, Sameer, we just hosted CBRE's Healthcare and Social Infrastructure Forum in Melbourne, which had a record turnout of investors, which shows the level of interest in the sector. And I recall you had called out senior living as a sector, which has now posted $3 billion of transaction volumes for five of the last six years. So now accounts for a meaningful 5%-10% of all transaction volumes. So let's dig into the demographic tailwinds driving this activity, Sameer.
Sameer Chopra
To set the scene, you know, here's some of the latest stats on Australia's birth rates, migration, and population aging. So Australia's current fertility rate is 1.48. The net overseas migration target is 245,000. There were a 115,000 new international students who've commenced in higher education, and there's an incremental 22,000 Australians who are gonna become over 85 as of mid this year. So broadly speaking, Phil, the fertility rate has been declining slightly. Net overseas migration, I'd say, has slowed, but remains above historical levels. International student intake is stable now over the last three years, but it is up 15% on the pre 2020 level. And Australians over 85 will see a a big acceleration in growth form, you know, they're growing at 3.7% per annum currently, and that growth rate will hit 8% by 2032.
Phil Rowland
Yeah, those are pretty compelling stats. So let's just focus on migration for a moment. There's obviously been a lot of new policy announcements across the whole political spectrum. Just putting that aside in terms of the variation of those, just broadly, how do you see this impacting the outlook?
Sameer Chopra
Yeah. I think the more interesting piece here is Phil with migration is, you know, what's already occurred.
Phil Rowland
Yeah.
Sameer Chopra
And its impact on real estate. And, there's an industry rule of thumb that migrants typically buy their first home in Australia after spending about seven years in their city of arrival. This is around the time when Australia kind of feels like home, you know, they get their citizenship, they feel settled in the community. And it gets interesting when you consider that Australia has just experienced outsized growth in net overseas migration over the last couple of years. You know, we estimate that during these last couple of years, migration was seven hundred and twenty thousand above its historical average. And towards the end of decade, this class of 2022 to 2025 migrants could create an incremental 200,000 buyers of residential homes, owner occupiers. So, you know, regardless of the current debate on migration settings, this cohort of potential buyers is already in the system.
Phil Rowland
That's a good point, you made. And, you know, I think as it happens too, this is gonna collide with when apartment supply is gonna hit, probably its most challenging time. So currently, there's a dearth of private investors in the apartment market. Later this decade, we could see a surge of buying from these recent Australians that, as you say, are in the system just as the supply falls further back.
Sameer Chopra
Yeah. Exactly. You know? And that's one of the reasons why we've been probably more optimistic on residential values. Our current forecast is for residential capital values, so home prices, to be up 20% at the end of the decade.
Phil Rowland
Yeah. And then just switching to, the supply picture in senior living, you know, one of your recent papers noted that aged care suppliers likely to sit around 500 - 1500 beds a year while demand is growing at 10,000, 18,000 a year. And most of the new supply and senior living is in landless communities.
Sameer Chopra
Yeah. That's right. You know, and when someone needs to move into aged care field, there's going to be an increasingly limited choice, if any. You know, occupancy in the sector is already sort of above 95%, And the vacant places are typically those that are being prepared for a new resident. So it's almost like there's no vacancy. And land lease does remain a growth sector. There's around 51,000 homes that are built, and there's probably around 35,000 in the pipeline. It's been a really compelling business model for developers and residents.
Phil Rowland
Yeah. Without a doubt. Right. So let's change gears a little bit. You know, we made a number of predictions during the course of the year, so let's see how things panned out. We had our first three predictions were anchored in the fundamentals. So number one, we expected positive net absorption in the second half across all sectors. Number two, stabilising incentives, particularly in industrial. And number three was merged to high single digit rent growth for Sydney and Brisbane office. So why don't you roll through those and see where we landed?
Sameer Chopra
Yeah. Look. It's been a nuanced picture by sector and city. Net absorption has continued to surprise. Occupiers are taking advantage of high incentives to transact. Incentives are really low in retail and holding steady. They're at peak levels, but stable in industrial. They're compressing in prime office, particularly in Brisbane and Sydney. You know, we called out earlier that Q3 net effective rent growth was 19.8% for Brisbane office. So I would say, you know, it's broadly at or above our prediction.
Phil Rowland
Of course. So you're giving yourself a pass. Yep. Yeah. Right. Okay. Alright. We had three other predictions. Number one was, scope for large portfolio deals and cap raising. The second one was just a risk around increased taxes on real estate. And then number three, the controversial view that residential values might stabilise and reaccelerate in the fourth quarter following the path of higher rents. So give us your wrap on that one.
Sameer Chopra
Yeah. I'd say, you know, we're definitely seeing an acceleration in, institutional capital raising, Phil, across BTR, land lease communities, student accommodation, office, industrial, and retail. You know, and this has included a mixture of fresh capital as well as capital recycling with new investors coming into the structure, and from a mix of offshore and domestic sources. And with a high interest rate environment, access to equity funding for growth becomes even more important. On our prediction on taxes, we got the structure wrong. So I'd expected that the state governments would lift land taxes to boost their revenues. Instead, the risk, you know, has emerged from federal government changes to capital gains and trust structure. And this has caused a bigger handbrake, particularly in the smaller ticket size where private wealth clients are more active.
Phil Rowland
Yeah. Absolutely. You know, I mean, we are seeing that. And in our private wealth team. You know, they're seeing around 25% fewer transactions by deal count and about a third less transactions by dollar value. Interesting, like, you know, clearance rates, are holding up above 80%. So the stock that is coming to market is transacting.
Sameer Chopra
Yeah. Look. Culprates, particularly in that private wealth space, are both, higher interest rates. And I think folks having to kinda rethink their ownership structure, you know, do I go with a trust or a company or a super fund or should I buy it in my personal name? I expect to feel like, you know, this temporary pause will pass, but that lower tempo could last a few more quarters. Then the final prediction we had was around, residential values. We generally thought the market would stabilise much more quickly, but this recent increase in interest rates, you know, has not helped. Nonetheless, you know, I continue to have conviction on capital growth as there's just this woeful supply of stock. And, you know, jobs growth remains really robust in Australia.
Phil Rowland
Yeah. Yeah. Absolutely. Righto. There you have it. The fizz up on our predictions for the year. It's probably a little early to talk about 27', but let's have a crack Sameer. You know, we're gonna be entering 27' with a few moving parts. You know, we've got a continuing fall on supply as you've articulated and potentially a different political landscape and what that entails for investment real estate and a higher base, you know, for interest rates. So what are you picking Sameer?
Sameer Chopra
Firstly, you know, the impact of falling supply across aged care, apartments, hotels, industrial, office, retail, it'll be sort of well and truly in the mix, and this should provide, you know, really good backdrop for accelerating rent growth. We'll keep a close eye on incentives. These are, you know, at elevated levels, and there is some evidence emerging that supply is getting cut even more than we'd expected. I would think that some tightening in incentives is likely to be our base case for 2027.
Phil Rowland
Yeah. The only thing I would add to this, Sameer, is that this picture that you just painted there is very unlikely to spread to industrial office in those secondary locations. So this ongoing bifurcation here looks fairly entrenched for this foreseeable future. You know, on the political front, both Victoria and New South Wales have elections coming up in the next few months. You know, there could be change in political leadership, especially in Victoria, which would be welcomed, by the way. The only thing to keep in mind is that the fiscal situation there is a long term problem. So even if there is a change in government in Victoria, you know, we don't expect an immediate or significant change in tax policy.
Sameer Chopra
Yeah. Phil, we'd, done some calculations, and we estimate that the property sector pays $49 billion each year in taxes to state governments. And, you know, property taxes make up somewhere between 30% and 36%, so call it a third, of state revenue in Victoria, New South Wales, and Queensland. For South Australia and WA, property tax is somewhere around a quarter of state revenue. So reducing taxes, whilst welcome for our sector, it'll be tough to underwrite in my view. But jeez, it's been tough in the sector. It's borne the brunt of taxation changes. Right? The introduction of absentee land tax, imposition of superannuation tax thresholds, removal of capital gains tax discount, also removal of negative gearing for established property. It's been tough.
Phil Rowland
Yeah. It has. Alright. So close out the predictions for 27', Sameer. Give us your official forecast, the CBRE House View on interest rates.
Sameer Chopra
For 2027, Phil, I'm looking for cash rates to be stable in the first half and scope for a single cut in the second half. But more importantly, you know, we're gonna keep our bond rate forecast above 5%, which means that cap rates are unlikely to compress, over the next twelve months in my view. So valuations and returns, you know, will be driven by rent growth and income. So, you know, the three markets that should be braced for the highest return in 27', I'm going early with some predictions, are likely to be, Brisbane and Sydney office. I think LFR will do really well more broadly. You know, I like the looks of Perth for industrial and retail. And I think, you know, residential in Melbourne and Sydney should also start to sort of reemerge with some positive returns for investors.
Phil Rowland
Alright. There you have it. Alright. Well, I think that wraps us up. Thank you, Sameer. Thanks for being a great partner through the year. And to our listeners, I hope you enjoyed this last edition of the House View for 2026. As always, please send us any questions that you might have via
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