Recently, we conducted a systematic review of CBRE’s Capitalisation Rate Outlook, released in December 2025.
The value of this report does not lie in calling the market “up” or “down,” but in how clearly it dissects the diverging paths across commercial property sectors amid shifting interest rate cycles, persistent inflation dynamics, and the repricing of risk.
Below are several key conclusions distilled from a buy-side perspective.
I. Interest Rates Are No Longer the Sole Variable—Risk Premiums Are Reasserting Control
CBRE emphasises that cap rates are not driven by a single factor. At their core, they can be simplified into two components:
•The 10-year real government bond yield, and
•The risk premium investors demand for bearing asset-specific uncertainty.
In 2025, despite the RBA delivering approximately 75 basis points of cumulative rate cuts, inflation volatility pushed Australia’s 10-year government bond yield back toward ~4.7%.
Against this backdrop, CBRE’s conclusion is clear:
Cap rate movements are likely to remain gradual and selective, rather than experiencing broad-based compression.
This signals a structural shift.
The era of relying solely on falling interest rates to drive valuation recovery is fading.
Going forward, relative performance across sectors will be driven primarily by fundamentals and changes in perceived risk premiums, not monetary policy alone.
II. Office and Industrial: Stable, but Largely “Fully Priced”
Office
While 2025 has shown early signs of stabilisation, national-level risk premiums are already below long-term averages.
Outside of Sydney’s prime CBD, cap rate compression potential appears limited. The recovery path is more structural repair than cyclical re-rating.
Industrial & Logistics
This sector has experienced nearly two decades of structural cap rate compression.
Risk premiums now sit close to historic lows, and ownership is highly institutionalised.
For long-term holders, industrial remains defensive.
However, from a forward return perspective, the sector has entered a mature phase, with limited scope for outsized incremental gains.
III. Retail: The Underappreciated “Structural Recovery” Sector
Retail is where the most compelling asymmetry now exists.
CBRE highlights several fundamental shifts:
•Pandemic and e-commerce disruption risks have largely been absorbed
•Retailers have transitioned to omnichannel (online + physical) operating models
•Core shopping centres—due to land scarcity, high replacement costs, and replication barriers—are once again being viewed as urban infrastructure-like assets
The data reinforces this view:
•Retail investment volumes in 2025 are expected to be the highest among all commercial sectors
•National shopping centre risk premiums sit around 3.60%—below long-term averages, but reflective of genuine capital preference
•CBRE forecasts a further ~35 bps of cap rate compression in shopping centres by 2028
Within retail, we place particular emphasis on:
•Neighbourhood Centres
•Large Format Retail (LFR)
These sub-sectors combine:
•Defensive cash flows
•Direct linkage to population growth
•Accelerating institutional participation
Their risk premiums are expected to remain structurally below 20-year averages.
Cornerstone Assets’ View: 2026 Is When Retail Returns Begin to Be Realised
From a buy-side standpoint, our conclusion is straightforward:
•2025 is a year of confidence rebuilding
•2026 marks the beginning of return realisation
Especially within retail.
As interest rates lose their role as the sole valuation catalyst—and as industrial and prime office assets remain largely priced—capital is rotating toward assets that are:
•Cash-flow resilient
•Inflation-pass-through capable
•Structurally scarce and difficult to replicate
Retail assets that meet these criteria are becoming a central focus of capital reallocation.
This is precisely why, over the past year, we have consistently increased our research depth and execution exposure to:
•Neighbourhood retail
•Large Format Retail (LFR)
•Core shopping centres
Not as a tactical trade—but as a structural positioning for the next phase of the cycle.
