As we move through 2025, commercial property investors are navigating an environment shaped by ongoing interest rate uncertainty, macroeconomic shifts, and evolving tenant demands. After several years of rapid changes in borrowing costs, the question on many investors’ minds is: Where to from here?
In this blog, we’ll explore the relationship between interest rates and commercial property, what the current landscape looks like, and what savvy investors should be watching to make well-informed decisions this year and beyond.
Why Interest Rates Matter So Much in Commercial Real Estate
Interest rates are more than just a line in the finance section—they’re a critical lever that impacts almost every aspect of commercial real estate investment. Here’s how:
• Borrowing Costs: The most direct effect is on the cost of debt. As interest rates rise, so do mortgage repayments and development financing costs.
• Capitalisation Rates (Cap Rates): Higher interest rates often lead to higher cap rates, which generally mean lower property values (if net income stays the same).
• Investor Yield Expectations: When risk-free rates (like government bonds) increase, investors demand higher returns from property investments to justify the risk.
• Tenant Performance: Higher rates can slow the broader economy, impacting tenants’ ability to grow—or even remain solvent—which in turn affects landlords.
Understanding these dynamics is essential for assessing acquisition opportunities, asset valuations, and portfolio performance.
2024 Recap: Where Are We Now?
To understand 2025, we need to quickly rewind to 2024. Following a period of aggressive interest rate hikes aimed at curbing inflation post-COVID, central banks across the globe—including the Reserve Bank of Australia (RBA)—adopted a more cautious “wait-and-see” approach in late 2023.
In 2024, inflation moderated somewhat, but concerns about wage growth, energy prices, and global supply chain instability remained. The RBA maintained a relatively high cash rate throughout most of 2024, hovering in the 4.10%–4.35% range, depending on economic data.
This cautious stance left commercial property investors with tighter margins and a less predictable rate outlook. While some sectors—such as industrial and prime retail—proved resilient, others, particularly secondary office and older retail stock, struggled to maintain values.
What to Watch in 2025: Key Interest Rate Trends
- Monetary Policy Signals from the RBA
Watch the language coming from the Reserve Bank closely—not just the cash rate decisions, but also the tone of meeting minutes and commentary. Key indicators to monitor:
• Inflation targets and forecasts
• Labour market data (unemployment and wage growth)
• Consumer spending and household debt levels
Any softening in these metrics may lead the RBA to consider easing rates, which could improve investor sentiment and reduce financing pressure. - Global Influences: The U.S. Federal Reserve and Global Bond Yields
What happens overseas can impact Australian interest rates, especially U.S. monetary policy. If the U.S. Federal Reserve begins cutting rates in response to slowing inflation or recession fears, we may see ripple effects in global capital markets—including lower bond yields and improved risk appetite for property.
Likewise, fluctuations in global bond yields affect the cost of institutional funding, especially for larger property investors and REITs. - Long-Term Rate Expectations vs Short-Term Volatility
In 2025, investors should differentiate between short-term movements and the long-term neutral interest rate, often referred to as the “new normal.” Many economists now believe the ultra-low interest rates of the 2010s were an exception, not the rule.
Commercial investors should therefore run scenarios with long-term rates between 3.5%–4.5% as part of their due diligence to assess sustainable debt servicing levels.
Implications for Property Valuations and Deals
Cap Rates Are Still Adjusting
Cap rates across office, retail, and industrial sectors rose throughout 2023–2024 in response to rising interest rates. In 2025, we may see:
• Stabilisation in prime-grade assets, especially those with strong tenant covenants
• Further softening in secondary or underperforming assets where rental growth prospects are weak or capital upgrades are required
Buyers and valuers are increasingly focused on debt assumptions and cost of capital, rather than just historical yields or comparable sales.
Valuation Gaps Between Buyers and Sellers
There remains a mismatch between what vendors expect and what buyers are willing to pay, especially in a cautious rate environment. This may create opportunities for well-capitalised buyers, particularly those not reliant on high gearing.
Tips for Investors in 2025
Whether you’re actively investing or holding an existing portfolio, here are several strategies to help navigate interest rate uncertainty:
- Stress Test Your Assumptions
Model your assets at higher cap rates and interest rates. Understand where breakeven points lie and how rising debt costs might impact cash flow. - Focus on Quality Tenants and Lease Profiles
Longer WALEs (Weighted Average Lease Expiry) and secure tenant covenants are more valuable than ever. Stable income can help weather cost volatility. - Lock in Finance Where Possible
If refinancing, consider locking in part of your debt at fixed or capped rates. Predictability matters in a volatile market. - Look for Counter-Cyclical Opportunities
Periods of rate uncertainty can bring opportunities, especially in mispriced assets, distressed sales, or markets where sentiment has shifted too far too fast. - Review Revaluations and Loan Covenants
Ensure you’re not at risk of breaching loan-to-value (LVR) or interest cover ratios due to softening values or rising interest bills.
Sector Snapshot: Who’s Best Positioned?
Sector – Outlook in 2025
Industrial – Remains resilient, though yield compression has slowed.
Retail – Stronger in convenience and large format retail.
Office – Still facing headwinds, especially older secondary stock.
Healthcare – Gaining interest as a defensive, income-stable sector.
Build-to-Rent – May benefit from high housing demand and institutional interest.
Final Thoughts: Stay Agile, Not Anxious
2025 will likely be a transitional year. While interest rates may not fall significantly in the short term, the broader environment is starting to stabilise. For commercial property investors, the key is not to wait for perfect conditions—but to stay informed, remain agile, and make decisions based on realistic scenarios and strong fundamentals.
Interest rate cycles come and go—but well-leased, well-located, and well-managed assets tend to perform over time.
