Office Begins Fresh Cycle as Turbulent 2020s Shift Gear

After a bizarre few years for commercial real estate, markets and investor behaviour are beginning to stabilise again, signalling an end to the “turbulent 2020s” for the sector. But while investors are coming back to the market, don’t expect a return to pre-Covid norms, with plenty more disruption on the way. Attendees at The Urban Developer’s Commercial Real Estate Summit, held in Sydney on October 31, were told by MSCI research and development vice-president Benjamin Martin-Henry that transactions data is showing the bottom is in. “Capital growth has obviously been quite severe over the last 18 months, 24 months or so, with property values really declining most in the office space,” Martin-Henry said. “But the good news is we’re starting to see an increase, in total terms anyway, and values are getting less bad.” Rolling annual returns for the MSCI Core Wholesale Index have turned positive for the first time since 2023. And for the first time in three years, all sectors tracked by the index are showing positive capital growth on a quarterly basis Diversified funds are leading the recovery at 1.2 per cent growth, closely followed by industrial at 1 per cent and retail at 0.9 per cent. Offices continue to lag at 0.52 per cent, according to MSCI, but “the good news is that if you look very, very closely, I think you’ll see a little bit of an uptick there”, Martin-Henry said. Markets have gone through the looking glass, with Martin-Henry describing the “turbulent 2020s” as an unpredictable period that skewed data for analysts and valuers. “When Covid hit, transaction volumes fell 400 per cent, and then it all bounced back the next year. “We had 18 months worth of transactions in nine months, so everything was up 500 per cent. And then, of course, the property recession hit, and then down 500 per cent—it was all over the place”. MSCI has tracked around $13.5 billion for the quarter at the time of the conference, or up around 58 per cent year-on-year. With transactions values and volumes returning, assets can be marked to market more easily, and capitalisation rates and gearing generated accurately. ▲ Large deals are leading activity, which may indicate that smaller transactions are struggling to access funding. Transactions are being driven by larger deals, and contracts over $250 million are up 57 per cent for the year compared to the same point in 2024. “When we start to see big deals, there’s a bit more confidence in the market. People are willing to write much larger cheques. So that’s what’s really driving the market. “But the fact that smaller deals aren’t driving the market is a little bit of a concern for me … the big end of town is spending, but the smaller end of town is still struggling to raise capital, still struggling to get debt financing,” Martin-Henry said. Gearing ratios have plateaued, aided by interest rate cuts and valuations bouncing off the bottom, but the pace at which ratios will decline is yet to be decided. “This is very important, because the only way to pay down debt, of course, is to sell assets, and that leads to a bit of a fire sale,” Martin-Henry said. “We haven’t seen that. And hopefully this gearing ratio will continue to go down, so we won’t see product flooding the market and pushing values further down.” Regions, sub-sectors show mixed results While data are generally turning positive, markets are still far from normalisation. Sydney offices remain the strongest regional sub-sector tracked by MSCI, despite broad agreement that vulnerabilities remain in workspaces. Nearly 77 per cent of the $4.4 billion invested into Sydney offices came from international buyers, showing offshore conviction in the market despite local trepidation. ▲ The Sydney office market remains attractive for investors of all types, despite the post-Covid slump. “From sheds to beds to meds, the only constant is that everyone thinks theyʼre overweight in office,” Martin-Henry said. The Victorian tax regime implies that “basically, if you buy in Melbourne, you’re immediately 10 per cent worse off than buying in Sydney. So that is an issue. So we’re seeing Melbourne volumes be particularly low”. “Melbourne is a worry … trying to get a transaction to stack up down in Melbourne is proving quite tricky for people.” Retail has continued to perform well, with more than $10.7 billion in sales to date this year. Domestic investors preferred that class, pushing $6.3 billion into shopping centres. That compares to $9.1 billion in office transactions and $9.4 billion in industrial. Around 41 per cent of total investment was made into alternatives, with foreign investment reaching about $8 billion there. About $7 billion has gone into alternative residential asset classes (such as build-to-rent, land lease, and purpose-built student housing). Senior living has taken the lion’s share, with about $4.7 billion deployed so far in 2025. While build-to-rent has been the next big thing for some time, “construction costs are still so high, and when you’re talking about build-to-rent, which has very skinny margins, that’s quite prohibitive. This year was supposed to be the largest year for construction starts with build-to-rent,” Martin-Henry said. International buyers return Across the sectors, around 49 per cent of investment activity was sourced from international buyers, up from a long-term average of 34 per cent. Investment source remains mixed, with private buyers driving acquisitions, and REITS continuing to sell down. The US and Canada led inflows, respectively opening their wallets to the tune of $4.4 billion and $2 billion. Japanese investors apicked up $1.5 billion of assets. Singapore, however, has been muted with its investment after 23 years of providing the top source of funds. ▲ Offices are the main draw for foreign investors, but sheds, data centres and alternatives are also drawcards. “A big reason for why they’re not particularly active in Australia is that 80 per cent of Singaporean capital, when it comes to Australia, goes into the office sector. Not a lot of people are really buying offices at the moment,” Martin-Henry said. “They love our country’s fundamentals, but they don’t understand our valuations … but now that valuations have started to change, I have heard that some Singaporean investors are underbidders on some of the large office towers. “That is good news, but it still seems to be quite strange. They’re not really investing in anything other than other offices in Australia.” While data centres have a huge pipeline, the asset class remains confusing to many. “There’s a constant argument about: what is a data centre? Is it property? Is it infrastructure? Is it utility? “The land value doesn’t seem to change on the data centre. It’s the shell that is the property part … the value is in the tech side, as opposed to the land and real estate components. “You can argue either case. What you can’t argue is that there’s so much money falling into it.” According to Martin-Henry, the Foreign Investment Review Board may consider integrating national security concerns into their approach to data centres in the near future, but their continued rollout is inevitable. “I think as more and more people get to grips with what we need from data centres, we’re going to see more and more investment into it, and these transaction yields will continue to flatten.” While interest rates may be on pause for the moment—the RBA announced on November 4 the rate would remain at 3.6 per cent—Martin-Henry sees the broader proposition for the commercial real estate sector as strong. “To be honest, this is where property shines. In periods of uncertainty—economic uncertainty, geopolitical uncertainty—by lease, it’s a pretty stable income stream. It’s also gone through a pretty severe correction, with offices losing up to 30 per cent of their value,” he said. “It’s cheap. It’s cheap and stable: possibly not a bad idea to invest in at the moment.”

Office Begins Fresh Cycle as Turbulent 2020s Shift Gear

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