Welcome to our latest market insights, where we explore emerging trends in the commercial property sector and spotlight key developments shaping the industry.

Interpreting signals vs noise

MARCH 2026

Looking through the lens of the last interest rate hiking cycle and major geopolitical shocks

A combination of significant global events has continued to induce market volatility, requiring investors to navigate the impacts of geopolitical conflicts, the reordering of international trade, AI disruption, private credit uncertainty, and other structural shifts.

Amid this ongoing turbulence, Australian unlisted commercial real estate (CRE) has delivered resilient returns. Strong income growth and stabilising capitalisation rates has resulted in solid returns which have outperformed other major asset classes since the beginning of 2026 (Figure 1).

Figure 1: Total returns of commercial real estate vs other major asset classes, 1Q26¹

The pertinent question is whether this momentum can be sustained. Recent geopolitical disruptions, combined with stronger-than-expected economic growth, have generated renewed inflationary pressures, prompting the Reserve Bank of Australia (RBA) to continue to calibrate monetary policy by increasing interest rates. It is therefore important to assess potential outcomes through the lens of the most recent interest rate hiking cycle, while accounting for the distinct characteristics of the current environment.

The inflation crisis and largest CRE repricing in 15 years

Between 2021 and 2023, global inflation surged to the highest levels in more than 15 years, forcing central banks throughout the world to implement the most rapid monetary tightening cycle since the early 1980s. Policy and broader interest rates rose sharply and rapidly from historic lows. This abrupt shift required property capitalisation rates to adjust to accommodate materially higher borrowing costs.

In Australia, the cash rate increased from 0.10% to 4.35% between May 2022 and November 2023. Over this period, capitalisation rates lifted from historic lows, increasing by an average of 150 to 200 basis points (bps) and driving the most significant valuation correction in more than 15 years. While the defensive characteristics of contracted lease income helped to cushion volatility, this income support was more than offset by the magnitude and speed of property capitalisation rate expansion.

The cash rate was subsequently held at this restrictive level for approximately 13 months before the RBA commenced its easing cycle. During CY25, the cash rate was cut by 75 bps, while average capitalisation rates recorded only modest compression (–13 bps) (Figure 2).

Figure 2: Cash rates and capitalisation rates from March 2022 to March 2026²

The stabilisation of property capitalisation rates, combined with resilient income growth, contributed to a meaningful acceleration in returns (Figure 3).

Figure 3: Components of commercial real estate returns³

As at March 2026, net total returns over the past 12 months increased to +8.1%, representing the strongest annual performance since November 2022.⁴

The RBA now faces the challenge of managing renewed inflationary pressures while determining an appropriately restrictive level for the cash rate. The cash rate has been increased by 50 bps during 2026, reaching 4.10% in March, with ongoing debate regarding the forward interest rate policy path. Consensus economist forecasts point to a terminal cash rate of approximately 4.35% for this cycle.⁵

Notably, a cash rate of 4.35% previously proved to be sufficiently restrictive and deflationary. At this level, markets also appeared comfortable with the spread between property capitalisation rates and borrowing costs.

Importantly, the aggregate level of interest rates and capitalisation rates remains materially higher than in mid-2022. As a result, any further interest and capitalisation rate adjustment is expected to be significantly smaller in magnitude relative to the approximately 410 bps adjustment experienced during the initial tightening phase, implying a far lower drag on CRE valuations and, therefore, returns.

Under this scenario, the income component of high quality CRE investments should continue to deliver predictable and stable returns. More broadly, CRE is expected to maintain its role as a defensive asset class, offering resilience and protection against heightened market volatility.

CRE in the context of major geopolitical shocks

The most immediate source of market uncertainty today stems from the conflict in the Middle East. Historically, Australia’s unlisted CRE sector has provided an effective hedge during periods of geopolitical stress.

With the exception of the early-1990s recession, the global pandemic, and the recent inflation shock, CRE returns have typically been in double-digit territory through major geopolitical events (Figure 4). Given the significant repricing that occurred between 2022 and 2024, the sector continues to present as a compelling entry point.

Figure 4: Australian unlisted CRE average returns vs ASX 200 following major geopolitical events⁶

Income durability and asset allocations

Amid evolving geopolitical developments, profound shifts are occurring across the global investment landscape. Australia’s unlisted CRE asset class, underpinned by predictable cash flows and relatively higher capitalisation rates, is well positioned to provide a stabilising ballast amid ongoing market turbulence. This dynamic is likely to support increased allocations to the sector from institutional investors as capital markets adjust and broaden.

Global investors continue to reassess risk, returns and portfolio construction. Within this hierarchy of risk and perceived safety, Australian unlisted CRE sits at the intersection of timely market opportunity, structural tailwinds supporting accelerated income growth, and compelling risk-adjusted returns. Transaction activity and capital allocations into the sector indicate that global investors are increasingly preparing to adopt a more assertive stance across Australia’s CRE markets, although transaction activity may slow in the short term.

The next investment paradigm is likely to be defined by income-led growth. In this environment, earnings delivery and cash flow durability will be the primary drivers of returns. Australia’s unlisted CRE sector is entering the early stages of a structural undersupply cycle. Ongoing supply-side shocks have reignited materials cost pressures, while interest rate volatility and persistently elevated wage costs continue to constrain forward development activity across the majority of the property sectors. As a result, rents continue to increase, with expectations for above-trend rental growth remaining in place for an extended period. Limited new construction projects are therefore expected to reinforce a prolonged phase of undersupply.

Performance across the CRE sector is expected to be dispersed. Portfolios tend to outperform peers when anchored by quality tenants benefiting from scale, market dominance, strong and resilient cash flows and structurally greater profit margins. Importantly, this outperformance will be driven by asset quality that enables pricing power, supported by market conditions that are increasingly favourable for income and returns.

Sources: Charter Hall Research, Economist Consensus, JLL Research, MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index, Oxford Economics.
1. ABS, ASX 200, MSCI, S&P 500. Data as at 31 March 2026.
2. RBA, JLL Research.
3. MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index Mar-26.
4. MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index.
5. Economist Consensus.
6. PCA/MSCI Australian All Property Index Dec-25.

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