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Australian commercial property transaction volumes fell sharply in the first quarter of 2026, dropping to $7.3 billion from $15.3 billion in the final quarter of 2025 as the escalation of the Iran conflict prompted investors to adopt a wait-and-see stance, according to property advisory firm Knight Frank.
The firm's Australian Capital View May 2026 report identifies the geopolitical escalation at the end of February as the key turning point that stalled what had been a promising start to the year, with an estimated $2.1 billion of transactions still under contract for the quarter.
“The escalation of the Iran conflict at the end of February proved to be a material inflection point for capital markets activity during the quarter, with robust early deal flow - underpinned by several large retail transactions - giving way to a marked softening through March as geopolitical uncertainty prompted many investors to adopt a cautious, wait-and-see stance," says Knight Frank senior economist Alistair Read,.
Despite the near-term pullback, Read argues that the structural fundamentals underpinning Australian commercial property remain compelling over the medium to long term, pointing to constrained new supply, healthy occupier markets and valuations that have already undergone significant adjustment.
"Concerns over a higher interest rate environment and broader macroeconomic headwinds are likely to temper near-term activity, however structural supply constraints across most asset classes continue to underpin a compelling medium-to-long-term investment case,” he says.
The retail sector was the most traded asset class in Q1 at $3.6 billion, followed by office at $2.1 billion and industrial at $1.2 billion.
Institutional investors accounted for 42 per cent of total transaction volumes during the quarter.
CBD office investment reached $1.1 billion in Q1, with a further $500 million under contract.
Notable deals included Charter Hall's $500 million acquisition of a 50 per cent stake in the O'Connell Precinct, OUE REIT's $357.2 million purchase of a 19.9 per cent interest in Salesforce Tower, and DWS Group's $166.4 million acquisition of 32 York Street.
Knight Frank's chief economist Ben Burston says while the latest round of interest rate rises has been unwelcome news for investors, he sees property remaining resilient compared to the previous rate increase cycle.
“Firstly, valuations are at a different level having already adjusted to the higher rate environment," says Burston.
"A recovery was commencing throughout 2025 but had yet to gather pace and broaden beyond core locations, so pricing is less vulnerable than at that time.
“Secondly, occupier markets are looking far healthier in the office and retail sectors in large part because of diminishing new supply."
Burston says office markets in particular are starting to see the benefit of a constrained supply pipeline, which is reflected in rental growth in the Brisbane, Sydney and Adelaide CBDs.
“Meeting feasibility targets was already challenging, but higher construction and material costs are now compounding that issue, which will further restrict new supply and ultimately support further rental growth," he says.
"Our modelling indicates that a 10 per cent rise in construction costs for a new premium office tower increases the required economic rent by around 5 per cent.”
Brisbane led annual net effective office rent growth at 11.7 per cent, followed by Sydney at 10.2 per cent and Melbourne at 6.8 per cent, according to Knight Frank's Australian Office Indicators for Q1 2026.
The supply picture is tightening further as construction costs continue to climb.
Knight Frank modelling suggests a 10 per cent rise in construction costs increases the required economic rent for a new premium office tower by about 5 per cent, effectively raising the barrier to new competing supply entering the market.
The Knight Frank research found institutional investors were the most active buyer group in the first quarter of this year, accounting for 42 per cent of total transaction volumes, followed by public capital at 23 per cent, and cross-border and private capital at 16 per cent each.
Michael Kwok, Knight Frank partner and Australian head of capital markets, says while transactional activity may remain subdued in the near term, investor demand for quality assets remains intact.
“Higher funding costs and global uncertainty may impact trading activity in coming months, but there is still significant demand for quality assets given improving prospects for rental uplift,” he says.
“We expect most investors will continue with their plans to deploy capital, rather than step back from the office market as we saw in 2023."
Looking beyond the recent headwinds, Kwok says an "interesting dynamic" in capital markets has been the return of superannuation funds to making direct acquisitions.
"In recent years, most major funds have been circumspect, preferring to maintain rather than expand their holdings, however over the past 12 months many have opted to deploy capital directly, acquiring large assets across all sectors, however living sectors has been a favoured target,” he says.
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