Australia's commercial property splits on office stress

Australia's commercial property market is splitting between weaker office assets and stronger industrial property, according to new data from CreditorWatch, which points to rising stress in office-heavy sectors.

Business failures, payment defaults and office vacancies remain elevated in parts of the market tied to office demand, while industrial and logistics assets continue to benefit from tight supply and stronger tenant demand.

CBD office vacancy rose from 15.2% to 15.9% in the six months to January 2026. Melbourne and Perth continued to record high vacancy rates, while Sydney's overall vacancy rate stood at 13.8%.

Industrial and logistics property presented a different picture, with national vacancy rates around 2% to 3%. Investor demand has been supported by eCommerce activity, automation and demand linked to AI-related infrastructure, including power supply and fast connectivity.

The divide is also showing up in business credit conditions. Business-to-business payment defaults are among the clearest signs of tenant distress, particularly in office-heavy industries such as professional services, retail trade, and transport and logistics.

Patrick Coghlan, chief executive officer at CreditorWatch, said the market was no longer moving in step.

"Australia's commercial property market is no longer moving as one.

"What we're seeing in the data is a clear split between assets exposed to office-based risk and those benefiting from structural growth. In this environment, landlords, agents and investors can't rely on lagging indicators. They need live insight into tenant payment behaviour and early warning signs of financial stress before problems show up in vacancy rates or defaults.

"Payment behaviour tells you what's coming next. Those who can identify risk early are far better placed to protect cash flow, manage exposure and make informed leasing and investment decisions."

Office pressure

Office markets have been dealing with the combined effects of earlier oversupply and changes in workplace use. Hybrid working has reduced demand in many locations, and lower-grade buildings are under particular pressure as tenants favour better-quality space or reduce their footprint.

That pressure is uneven. CreditorWatch chief economist Ivan Colhoun said conditions vary by state, sector and individual asset class, leaving owners and investors to navigate a more fragmented market than in previous cycles.

"The outlook for commercial property varies significantly by state, sector and even within individual asset classes.

"Industrial remains the strongest performer, supported by low supply and powerful structural tailwinds from eCommerce, automation and growing demand for AI-related infrastructure. Office markets, by contrast, continue to face challenges from earlier oversupply and the sustained impact of working from home, particularly for lower-grade buildings."

Broader risks

The report also pointed to wider economic pressures affecting the sector. Recent interest rate rises and volatile energy prices have created a more cautious backdrop for commercial property, especially for owners of secondary office assets with persistent vacancies.

Colhoun said some markets were stabilising, but weaker office buildings would remain under strain unless owners made major changes to their use or quality.

"Recent interest rate rises and energy price volatility point to a more cautious environment for commercial property overall. While some markets are stabilising, secondary office assets with high vacancy rates will continue to face pressure unless they are significantly upgraded, repurposed or redeveloped."

Another issue flagged in the report is regulatory change for property professionals. Anti-money laundering and counter-terrorism financing Tranche 2 reforms will bring real estate professionals into the regime from 1 July 2026, increasing compliance obligations and requirements around beneficial ownership identification.

Those changes will add to the administrative burden for agencies and other market participants already dealing with uneven demand, refinancing challenges and shifting tenant risk across the commercial property sector.