Commercial property isn’t moving in a straight line. Knight Frank’s 2026 outlook shows the next phase of the cycle will look very different from the past decade – and the sectors leading the recovery aren’t the ones many expected.
 
After years of ‘beds and sheds’ outperformance, the gap between sectors is narrowing. Office and retail assets are now positioned to deliver stronger income returns in 2026, helped by growing tenant preference for well-located, higher-quality space.
 
At the same time, elevated construction costs have pushed economic rents to record highs. That’s making new developments harder to justify – tightening supply and supporting performance for existing buildings.
 

Demand isn’t uniform

Vacancy rates may look elevated on paper, but Knight Frank notes that prime office precincts in Sydney, Melbourne and Brisbane are already showing rental growth. Tenants are upgrading into better-quality space, creating a two-speed market where premium assets outperform while secondary stock struggles.
 

What this could mean for borrowers in 2026

 
With supply pipelines shrinking and income performance improving in key precincts, lenders are showing interest in sectors demonstrating stability and recoverability. Deals backed by strong tenant profiles or tightening local markets may attract better terms as confidence builds.