Australia’s commercial real estate market showed signs of stabilising in the second quarter of 2026, with a resurgence in large portfolio transactions helping offset the impact of higher interest rates and geopolitical uncertainty.
According to MSCI’s latest Australia Capital Trends report, $11.7 billion worth of operational commercial property changed hands during the quarter.
While transaction volumes were down 3 per cent from a year earlier, the result marked a significant improvement on the 17 per cent annual decline recorded in the first quarter and sat in line with the five-year second-quarter average, while exceeding the 10-year average by 5 per cent.
The recovery was underpinned by a return of larger portfolio transactions, with deals totalling just under $5 billion during the quarter, up 45 per cent year on year, while portfolio transactions reached $6.4 billion across the first half of 2026, an increase of more than 50 per cent.
“Larger portfolio deals require a level of confidence that smaller, single-asset transactions don’t,” said Benjamin Martin-Henry, head of private assets research, Pacific at MSCI.
“The return of this scale of capital despite a challenging macro backdrop is a meaningful indicator of where investor conviction currently sits in this market.”
The report noted the improved activity came despite an increasingly difficult macroeconomic backdrop.
Markets had expected the Reserve Bank of Australia to cut interest rates during 2026, but instead the central bank raised the official cash rate three times in the first half of the year to 4.35 per cent as it sought to curb persistent inflation.
At the same time, war involving the US, Israel and Iran disrupted the Strait of Hormuz, driving oil prices higher and adding further uncertainty to inflation expectations heading into the second half of the year.
Martin-Henry said the rebound in transactions should not be interpreted as evidence the market had fully adjusted to higher borrowing costs.
“Given the lag between deal negotiation and settlement, much of this quarter’s improved activity likely reflects transactions that were struck before the latest round of tightening took full effect,” he said. “That doesn’t necessarily indicate higher rates are being absorbed easily. Rather, it suggests the market hadn’t yet felt the full weight of them when these deals were done.”
Industrial assets remained the strongest-performing sector, with transaction volumes climbing 64 per cent year on year to $5.2 billion during the quarter. According to MSCI, this has lifted first-half industrial investment to $6.5 billion, up 21 per cent.
Hotel investment also strengthened, with volumes more than tripling from a year earlier to $1.3 billion, supported by portfolio acquisitions including Chow Tai Fook and Far East Consortium’s purchase of Star Entertainment’s Queensland hotel assets.
Retail transaction volumes were broadly unchanged at $3.1 billion, while office investment fell 16 per cent to $1.6 billion as investors remained selective. However, commercial residential activity declined sharply, with year-to-date volumes down 82 per cent following the absence of the large portfolio transactions recorded in 2025.
Meanwhile, domestic investors continued to drive activity as offshore buyers remained cautious.
Cross-border investment fell 45 per cent year on year to $3.1 billion, reducing overseas investors’ share of total transaction volumes to 26 per cent from 47 per cent a year earlier.
Domestic investors deployed $8.6 billion during the quarter, representing a 33 per cent increase, while traditionally active investors from Japan and Singapore were largely absent.
“Global capital is being more selective about where it deploys, and Australia is competing for a smaller pool of active offshore capital than it was 12 months ago,” Martin-Henry said. “Domestic investors have stepped in to fill that gap, and this quarter’s numbers illustrate the extent to which the recovery in conviction has been driven locally.”
MSCI’s analysis of wholesale property funds also pointed to more moderate performance. The MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index returned 2.1 per cent during the second quarter, down from 2.3 per cent in the first quarter and 2.4 per cent in the final quarter of 2025.
Industrial funds were the only category to improve, returning 3.4 per cent as capital growth reached its strongest quarterly result since June 2022. Retail returns slowed to 1.7 per cent from 2.6 per cent, while office eased to 1.6 per cent.
Although office capital growth remained positive at 0.4 per cent, values were still around 31 per cent below their September 2022 peak.
“Rising rates and renewed oil-driven inflation pressure make some easing in performance unsurprising,” Martin-Henry said. “What matters is that the index has stayed in positive territory through two consecutive quarters of slowing growth. Values are holding up reasonably well, even as the macro backdrop has turned more difficult.”
The report also highlighted improving conditions in Australia’s build-to-rent market, with the Property Council of Australia/MSCI Australia Build-to-Rent Property Index delivering a total return of 7.1 per cent for the year to March 2026 as capital growth recovered from earlier declines.
“The index supports investors by providing the evidence base needed to treat build-to-rent as a mainstream allocation alongside other unlisted property asset classes,” Martin-Henry said. “It is greater transparency on performance, rather than any single transaction, that is more likely to bring additional institutional capital into the sector over time.”