Business Insights | Australian Commercial Property Outlook 2027: AI, Interest Rates and Tight Supply

From higher interest rates and evolving tax settings to shifting capital flows and rapid AI adoption, a raft of forces played a part in reshaping markets in 2026, yet occupier demand, rental growth and investment activity remained more resilient than many expected. 

CBRE’s CEO Australia & New Zealand Phil Rowland and Pacific Head of Research Sameer Chopra look back at what happened in the property market this year and share their outlook for 2027 in Talking Property’s House View Q4 podcast. 

How is AI affecting office and data centre demand in Australia? 

Rapid AI uptake is impacting every business and industry across Australia to varying degrees, and Phil says it’s something CBRE is heavily focused on.  

“We can clearly see the productivity benefits that are emerging with AI but, at the same time, it is important to be balanced,” he says. 

“It's a significant change management exercise that relies on really high-quality data. And in many cases, the ROI is still difficult to quantify precisely. We can see the opportunity, but there are still plenty of unknowns.” 

AI’s impact on office demand and occupier behaviour, as well as accelerating data centre demand, are areas many in the commercial real estate are watching closely. 

Sameer says looking at the market now, there’s a strong case for positive absorption with clients in industries including tech, finance, and professional services looking to expand space or use co-working space to support initial market entry.  

“I was also speaking with a large client who's looking to convert some of their collaboration space into desks as headcount growth and activity levels continue to rise,” he adds. 

“If you look at the most recent jobs numbers, while many would have expected to see AI and tech related job displacement, what we saw is professional services has added 26,000 jobs year over year. Finance has added 13,000 jobs year over year. Retail has added 25,000 jobs year over year. I'd say the demand is defying the narrative.” 

The rapid uptake of AI has also seen a rise in demand for data centres globally, with Australia one of the key markets for Asia Pacific.  

“Looking at the global picture, the inventory of data centre stock is increasing rapidly,” Sameer says. “Our US team said that they're seeing 33% growth in inventory year over year. In Sydney specifically, inventory, that's the built stock, is a little bit under 1 gigawatt right now. 

“The other big thing we are seeing with data centre space is falling vacancy rates. In the main US markets like North Virginia, vacancy rates have fallen from 0.8% to 0.3%, that’s super tight. In Sydney, vacancy is around 4.5%. Both Sydney and Tokyo are markets in our region with the highest level of absorption and the most interest,” Sameer adds. 

What do higher interest rates mean for commercial property valuations?

Sameer notes there is broad consensus that higher interest rates are being driven by three factors in Australia: persistent budget deficits, sticky inflation rates and bond issuance associated with the Australian data centre build out. 

“Aussie bond yields are now into the 5% range. They're up about half a percentage point just in that third quarter,” Sameer says. 

“We've also seen the slightly higher credit margins, particularly for real estate in secondary locations. Typically, this would have seen us expanding our cap rates but for Q3, what we saw is stable cap rates for prime real estate, all sectors, offset by some expansion in secondary real estate. We've seen some yield expansion in parts of the private wealth market, assets which are typically in the $20 - $25 million dollar range, and some cap rate compression across areas of the retail sector,” Sameer adds. 

Phil notes cap rates across prime assets have been more stable across sectors. While many factors contribute to this, vendors being reluctant to sell these assets and constrained supply delivering better than expected rent growth are likely to be significant drivers.  

Looking at valuations, Sameer says in the first half of the year, while cap rates remained stable, valuations grew by 1% - 4%, supported by rent growth. 

“From here, I would expect valuations could still be sort of flattish as rent growth offsets any softening in the yields,” Sameer explains. “In my view, valuations for prime assets have bottomed but there could be a bit more to give for secondary assets. So, while rates are a threat, fundamentals are currently offsetting them for prime real estate.” 

How will constrained supply affect Australian property markets? 

Lower supply is creating some urgency in the market, with CBRE data showing supply for industrial and apartments will be 25% to 30% lower over the next five years compared to the previous ten years, and 40% to 50% lower for hotels, office, and shopping centres. 

“Vacancy indicators globally are also moving positively as absorption meets several years of weak supply. Manhattan office vacancy has fallen by 3% over the last year, and Toronto has moved from 19% vacancy in late 2024 to about 13% today,” Phil says. 

“It’s a similar story in logistics,” Sameer adds. “In the last quarter, the UK saw half a percentage point of compression in vacancy and it's down to around 6.5%. In Montreal in Canada, vacancy again compressed by about half a percentage point to 6.3%. The other interesting global theme is in the industrial sector with demand for newer and larger facilities.” 

Supply is also a significant theme in Australia’s seniors living sector, with recent CBRE research showing aged care supply is likely to sit around 500 to 1500 beds a year while demand is growing at 10,000 to 18,000 beds a year.  

Which Australian property markets could perform strongly in 2027? 

Sameer says he expects falling supply to have an impact across aged care, apartments, hotels, industrial, office and retail, which should provide a good backdrop for accelerating rent growth. 

“I’d also keep a close eye on incentives, which are at elevated levels now. There is some evidence emerging that supply is getting cut even more than we'd expected, and I would think some tightening in incentives is likely to be our base case for 2027,” Sameer adds. 

Phil notes this is unlikely to extend to office in secondary locations with bifurcation looking fairly entrenched for the foreseeable future.  

When it comes to interest rates, Sameer says he expects stability in the first half of 2027 with scope for a single rate cut in the second half. 

“Importantly, our bond rate forecast remains above 5%, which means that cap rates are unlikely to compress over the next twelve months in my view. So, valuations and returns will be driven by rent growth and income,” Sameer says.  

“The markets that should be braced for the highest return in 2027, in my view, are likely to be Brisbane and Sydney office. I also think large format retail will do well more broadly. I also like the look of Perth for industrial and retail. And I think residential in Melbourne and Sydney should also start to reemerge with some positive returns for investors,” Sameer adds.