The momentum in Australia’s retail property sector, which was the strongest performing commercial property sector in 2025, carried into 2026, but new risks and uncertainties have arisen, according to Knight Frank’s latest research.
The firm’s latest Australian Retail Review found household spending growth and tightening supply have driven retail outperformance into 2026, but geopolitical pressures have introduced new risks that may weigh on the sector this year.
The report shows household spending and consumption accelerated through late 2025 and into early 2026, supporting stronger tenant sales, rising re-leasing spreads and a marked improvement in retailer profitability. This translated into retail delivering the strongest total return of all commercial property sectors in 2025, with annual returns of 9.2%.
As a result, investor demand surged last year, pushing total retail transaction volumes to $14.4 billion in 2025, up 43% year-on-year.
Elevated transaction activity continued into early 2026 with around $3.6 billion of retail transactions in Q1 2026.
“Retail clearly emerged as the standout commercial property performer in 2025,” said Knight Frank Senior Economist, Research & Consulting Alistair Read.
“Improving household spending, limited new supply and stronger leasing fundamentals combined to drive better income growth and renewed investor confidence in the sector.”
Spending growth lifts retailer performance
Household spending rose 4.6% year-on-year to February 2026, reflecting improving real incomes, easing inflation through much of 2025 and a shift by households from saving back toward consumption. This fed directly into tenant performance, with average EBIT margins across major retailers rising to 8.9% in H1 2026, their strongest level in several years.
Improved trading conditions supported re-leasing outcomes, with average retail leasing spreads rising 4.2% in 2025, helping lift income returns and underpin capital values.
“Stronger consumer spending was critical in restoring momentum to the retail sector,” said Mr Read.
“Retailers have generally been better able to absorb costs, rebuild margins and support sustainable rental outcomes, particularly in higher-quality centres.”
Geopolitical tensions introduce new headwinds
The report cautions that the recent outbreak of the conflict in the Middle East – particularly the length of the conflict – represents a key downside risk to household consumption through the remainder of 2026.
“Higher fuel prices, flow-on cost pressures across supply chains, and recent interest rate increases are
collectively squeezing household budgets, and early consumer sentiment data suggests confidence is already softening,” said Mr Read.
“While household balance sheets remain generally resilient, heightened uncertainty over future costs is likely to weigh on spending — particularly in discretionary categories — in the months ahead.
“Tenant performance is also expected to be impacted by both higher costs as well as lower consumer demand, with pressure on retailer margins likely to impact income growth for investors.
“Early indicators suggest elevated uncertainty has already begun to affect the market. While retail investment enjoyed its strongest start to a year in a decade, with nearly $3 billion transacted by the end of February, activity stalled in March, as investors took a pause amid elevated uncertainty.”
Medium-term fundamentals remain intact
Despite near-term uncertainty, Knight Frank expects medium-term retail fundamentals to remain supportive. A constrained development pipeline, elevated construction costs and limited feasibility for new supply continue to underpin space scarcity and rental growth prospects.
While rising interest rates may limit further yield compression in the near term, improving income growth is expected to sustain buyer appetite and support tighter yields over the medium term, even as the risk-free rate remains elevated.
“Retail has entered this period of uncertainty from a position of strength,” said Mr Read.
“Supply-side constraints, population growth and improving income fundamentals remain powerful structural supports for the sector.”
Five key themes shaping the retail outlook in 2026
The Australian Retail Review identifies five themes likely to define retail performance over the coming year:
- Interest rate hikes may keep yields steady
Rising borrowing costs are expected to pause yield compression, though yields are forecast to remain broadly stable. - Underspending on CAPEX is creating risks
Deferred capital expenditure is emerging as a material risk for asset performance and future valuations. - Early signs of margin pressure on tenants
Higher operating costs and softer consumer confidence are prompting more defensive leasing strategies. - Prime centres continue to outperform
Stronger sales, higher foot traffic and resilient demand continue to support rental growth in prime assets. - Rising requirement for logistics integration
As online and physical retail converge, centres are under pressure to deliver efficient, tenant‑agnostic click‑and‑collect solutions.
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