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Higher rates put rental growth in the spotlight for commercial investors
The higher-for-longer interest rate environment has prompted a drastic shift in the commercial property landscape, reinforcing the importance of asset selection and rental growth to drive returns.
New research showed that as higher interest rates persist, commercial investors have increasingly sought out high-quality commercial assets while turning to strategies that deliver stronger rental returns.
According to Knight Frank’s Australian Capital View – September 2026, investors were particularly prioritising value-add strategies and finding commercial properties in locations where rental growth was supported by tight supply.
Knight Frank chief economist, Ben Burston, said that despite the economy proving more resilient than originally predicted earlier this year, higher interest rates were clearly shaping investment strategy.
“The rise in inflation and interest rates this year has been far less severe than the inflation and interest rate shock experienced in 2022 and 2023, while households and businesses are entering this period from a much stronger position,” Burston said.
The report showed the commercial market still remained resilient, with Australian property transaction volumes rising to $14.3 billion in Q2 2026 from $8.8 billion in the previous quarter.
The results took total first-half investment activity to just over $23 billion, the strongest H1 result since 2022.
Data showed that industrial ($5.9 billion) and retail ($3.4 billion) assets drove the bulk of the activity, supported by strong domestic investor demand and growing confidence in longer-term market fundamentals.
“The key difference for investors is that higher interest rates are likely to persist for longer,” Burston said.
According to Knight Frank partner and head of capital markets Australia, Michael Kwok, commercial investor appetite remained healthy despite persistent macroeconomic headwinds and geopolitical uncertainty.
He said the fact that transaction volumes rebounded strongly during a period of uncertainty demonstrated that capital continued to flow into commercial property
“However, investors remain highly selective about capital deployment, focusing mostly on high-quality assets with clear near-term structural tailwinds,” he said.
“The preference for many groups now, however, is to target core plus and value-add strategies rather than core investments with the likelihood of a lower return.”
Kwok said the higher interest rate environment had resulted in many investors seeking 10 to 15 per cent returns, rather than the standard eight to 10 per cent benchmark.
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“Investors are also concentrating on sectors and locations where rental growth is being supported by constrained supply,” he said.
"We're seeing strong demand for prime office assets in Sydney and Brisbane CBDs, while industrial investors are focusing on infill locations where supply remains limited.”
According to Burston, rental growth, rather than yield compression, will be the main driver of performance in the near term.
“This places a premium on market segments experiencing strong growth and without the prospect of new supply dampening this momentum,” he said.
When compared with the rest of the globe, Kwok said Australian real estate continued to be favourable, attracting both domestic and offshore capital.
“As confidence improves and uncertainty recedes, we expect investors to remain active, particularly in sectors benefiting from strong occupier demand and limited new supply.”
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