As we look ahead in 2025, the commercial real estate (CRE) market in Australia is positioned for a period of recovery and growth. After facing several challenges in the past few years, including disruptions caused by the pandemic and shifting economic conditions, the market is showing signs of resilience. The outlook for the upcoming year is largely influenced by macroeconomic factors, such as the official cash rate set by the Reserve Bank of Australia (RBA), inflation trends, employment levels, and construction costs. These elements, coupled with an improving consumer confidence, are likely to contribute to more activity across the commercial property sector, from office spaces to industrial and retail developments.
This blog explores the key economic drivers behind the upward trends in the CRE market in 2025, with a focus on the RBA’s monetary policy, inflationary dynamics, labour market conditions, and construction trends. We will also highlight the experts’ predictions for the year ahead and how these factors are working in tandem to boost investor and consumer confidence.
Recent Movements in the Official Cash Rate and Economic Forecasts
One of the most critical factors influencing the commercial real estate market is the official cash rate, set by the Reserve Bank of Australia (RBA). In the last couple of years, the RBA has taken aggressive measures to control inflation, raising interest rates consistently to a recent high of 4.35%. These hikes were designed to cool the economy and bring inflation back under control, but with signs of inflation easing in recent months, we finally saw a recent drop of 25 basis points, lowering the official cash rate to 4.1% at the most recent RBA meeting.
Economists and market analysts are closely watching the RBA’s actions, with many predicting that the official cash rate will experience further cuts throughout 2025. Lower interest rates would have a direct effect on CRE markets, as they reduce borrowing costs for investors and developers, making it easier to secure financing for new projects and acquisitions. Lower rates also make commercial property a more attractive investment compared to other asset classes, such as equities or bonds. This shift in monetary policy is expected to fuel more activity in the commercial property sector, providing a further boost to market confidence.
However, the RBA’s decisions will be data-driven, meaning it will closely monitor inflation trends and economic growth indicators before taking action. If inflation continues to moderate, and if the labour market remains robust, there is a high likelihood that the RBA will continue toward easing monetary policy to support economic growth in 2025.
Inflation Easing and Alignment with the RBA’s Target Range
A significant factor contributing to the optimism surrounding the Australian economy is the ongoing easing of inflation. Inflation, which reached multi-decade highs in 2022 and 2023, is now showing signs of moderation. As of late 2024, inflation is gradually aligning with the RBA’s target range of 2-3%, providing relief to consumers and businesses alike. The moderation of inflation is essential not only for economic stability but also for the broader commercial real estate market, where inflationary pressures on rents, construction costs, and operational expenses have been a concern.
Core inflation, also known as underlying inflation, is a key focus for the RBA. Unlike headline inflation, which includes volatile items like food and fuel, core inflation reflects the underlying price trends in the economy. Recent reports indicate that core inflation has also been easing, suggesting that the RBA’s measures to tighten monetary policy over the past couple of years have been effective in curbing price pressures. This trend is expected to continue, with economists predicting that inflation will stabilise in the coming months.
For the commercial real estate market, a return to stable inflation means fewer cost escalations for developers and landlords. This can lead to more predictable rent growth, improved investor sentiment, and more opportunities for property acquisition and development. Additionally, stabilised inflation helps create a more stable environment for tenants, who may be more willing to commit to longer leases, contributing to overall market stability.
Impact of the Unemployment Rate on Commercial Real Estate
The relationship between unemployment and the commercial real estate sector is multifaceted. Australia’s unemployment rate, as of 2025, is forecasted to remain relatively low, continuing the trend observed over the past few years. This decline in unemployment is expected to have significant implications for the commercial real estate market.
- Increased Demand for Office and Retail Spaces: A lower unemployment rate often signals a growing economy, which can result in businesses expanding their operations. As businesses grow, the demand for office spaces increases. This uptick in demand could lead to a reduction in office vacancies, especially in key cities like Sydney, Melbourne, and Brisbane. For retail spaces, while e-commerce has certainly had an impact, businesses still require physical locations to interact with consumers, especially in urban hubs. A low unemployment rate suggests a stronger consumer base, potentially leading to higher foot traffic in retail districts.
- Business Confidence and Investment: With unemployment falling, business confidence tends to rise as employers anticipate a stable labour market and greater consumer spending. As companies feel more secure, they may increase their investment in physical infrastructure, including leasing or acquiring commercial properties. This could lead to an increase in demand for both office space and industrial properties, particularly in rapidly developing regions outside of major cities.
- Rising Wages and Labour Costs: While a lower unemployment rate generally benefits the commercial real estate sector, it can also lead to higher wages as businesses compete for skilled labour. This could, in turn, push up operational costs for companies. For commercial real estate landlords, this might translate to higher rents as businesses look to offset their increased expenses. However, the need for businesses to stay competitive might also drive demand for flexible workspaces, as companies try to minimise long-term overhead costs.
Trajectory of Materials and Construction Costs in 2025
As the demand for commercial real estate increases, so too does the pressure on the construction sector to meet that demand. In 2025, construction costs in Australia are expected to continue rising, driven by several key factors:
- Global Supply Chain Disruptions: The effects of global supply chain disruptions, which were particularly felt during the pandemic, are still impacting construction materials in 2025. The costs of raw materials, such as steel, timber, and concrete, have seen significant fluctuations. While the global supply chain is slowly recovering, any further disruptions or delays in sourcing materials could result in higher construction costs.
- Labour Shortages in Construction: Another major factor contributing to rising construction costs is the ongoing labour shortage in the Australian construction sector. Despite efforts to attract skilled workers, many projects are delayed due to a lack of qualified labour, which can lead to cost overruns. The increased demand for construction workers may push up wages in the sector, contributing to higher overall costs for new developments.
- Sustainability and Green Building Practices: Sustainability is becoming a central theme in the commercial real estate sector. In 2025, developers are expected to prioritise green building standards and environmentally friendly materials, which can often carry a premium price tag. The use of energy-efficient systems, sustainable building materials, and eco-friendly designs are likely to drive up initial construction costs but offer long-term savings in terms of operational expenses. Moreover, as green building certifications such as Green Star and NABERS continue to gain prominence, demand for high-performance, environmentally conscious buildings will increase.
- Government Initiatives and Infrastructure Investments: The Australian government is expected to continue its investment in infrastructure projects, particularly in urban renewal and the development of regional hubs. This will not only increase demand for construction services but also affect the price of materials. As these initiatives advance, developers may face challenges in sourcing both materials and labour, further contributing to cost increases.
Conclusion
Australia’s commercial real estate market in 2025 presents a promising outlook, with key upward trends in both demand and investment. The impact of the stabilised inflation, lowering interest rates and a low unemployment rate will likely stimulate demand for office, retail, and industrial spaces, driven by business expansion and greater consumer spending. Meanwhile, rising construction costs, influenced by supply chain issues, labour shortages, and sustainability practices, will present challenges for developers but also open up opportunities for innovation.
Ultimately, navigating these trends will require adaptability from investors, developers, and businesses in the commercial real estate sector. By staying informed and proactive, stakeholders can capitalise on the opportunities ahead while managing the challenges of a rapidly changing market.
If you’re looking for guidance in the commercial real estate market and understanding how these factors may impact your plans, please contact our team and we would love to help!
