Interest rate hike puts commercial market into the slow lane

Commercial property experts say the rate hike will most likely impact the already struggling office market, while the retail and industrial sectors are expected to continue to perform steadily.

“I don’t think there’s any asset class that’s particularly immune,” said Vanessa Rader, Ray White Group’s head of research. 

“I think that a lot of the asset classes are well priced, although office will probably continue to still do it tough. But things like industrial and retail will probably come out the best.”

The rate rise was widely tipped by economists, given the RBA’s rate increases in February and March. Rising inflation and geopolitical tensions, particularly the crisis in the Middle East, tipped the scales in favour of anything but a rate cut.

Rader said this cautious strategy would see any momentum gained in the commercial property market last year slow, as investors take a wait-and-see approach.   

“I think that it’s going to be a slow burn of a year,” she said.

“There’s no urgency in the marketplace, so if you’re looking to buy something, what’s the difference if you buy it now or if you buy it in six months’ time? Let’s just wait and see what goes on.

“We’ll also see due diligence periods really stretch out. So, even if people do commit to kind of buying something, those periods will extend, and so they have the ability to kind of jump out or not during that time.”

The RBA’s move is expected to foreshadow more cautious interest rate decisions throughout the year as it struggles to keep a lid on inflation, which rose to 4.6 per cent in the 12 months to March 2026.

While the rate rise shouldn’t impact values, it’s set to put pressure on rental growth, said Ben Burston, Knight Frank’s chief economist, research and consulting.

“Rent growth is going to be needed to drive performance,” Burston said. 

“The outlook for rent growth will be the differentiator between assets that perform well and those that don’t. So, at a time of higher uncertainty, it’ll be harder to trade those less favoured assets.”

Today’s news compounds the difficulties around construction costs that the commercial market is seeing across the board. Development supply pipelines are running dry, particularly in the office sector, but this shortage of new projects is likely to drive up rental growth, said Burston.

“It’s a silver lining in the sense that it means that the supply side will be constrained and we won’t have much new supply coming into the markets, and so that tends to feed into rent growth,” he said.

“That’s something that we have been seeing playing out. We’ve been seeing rent growth in retail, and we’ve also been seeing quite strong rent growth in office markets, which has accelerated over the past 12 months.