The retail comeback: why 2025 surprised everyone

In 2025, the wider Australian retail property market exhibited robust national recovery from the post-pandemic disruptions and the upward interest rate cycle. Continued shifts in demographics and behaviour, including population growth, changes in lifestyle and work patterns, consumer activity, and the urbanisation of regional areas, have all contributed to creating an environment that attracts sustained demand from investors.

Rising construction costs, albeit at a lower rate than previous years, appear to have slowed supply somewhat, with limited new and high-quality stock being offered to the market. This has led to increased competition for well-located tenancies.

Inflation and the resultant upward interest rate cycle, which commenced in early 2022, stabilised towards the beginning of 2025 with the four interest rate cuts (to 3.60 per cent in August 2025) providing some increased confidence for investors towards the end of the year. Consumers also began spending more as cost-of-living pressures eased somewhat in comparison to the peak.

The expansion of e-commerce globally has driven changes in retail demand throughout Australia, with consumers increasingly shopping online, even though it is clear that physical retail remains essential. Retailers are seeking formats that support integrated online and offline capabilities that accommodate in-person shopping and easy click-and-collect experiences.

Many agencies reported a strong uplift in investment transaction volumes in the 12 months to July 2025 underpinned by stronger performance in the retail sector due to factors such as increases in household spending, the lower interest rate environment and lowering vacancy levels. The performance of the overall retail market does vary quite considerably between the different metropolitan and regional markets around Australia, with some parts of Victoria including the Melbourne CBD still lagging to some extent while Brisbane benefits from opportunities associated with the upcoming Olympics in 2032 such as fast-tracked infrastructure improvements and global exposure.

Throughout 2025 it has been clear that prime retail properties have remained highly attractive to investors with yields and capital values remaining relatively firm despite the fluctuations in the broader interest rate environment. Investors have a preference for assets with strong local catchments and a diversified tenant base. Strip and secondary retail properties continued to see varied results which are highly dependent on the local markets. There continues to be downward pressure on rents as some tenants struggle with increased costs and rental affordability.

Throughout 2025, the wider retail property market has avoided many of the negative forecasts laid out in earlier years and has remained resilient.
The surge in demand for experiential retail which integrates entertainment, wellness and lifestyle activities into single precincts has reportedly helped offset the lower spending in some non-discretionary categories. These immersive experiences generally increase foot traffic, dwell times and repeat visits.

Increased collaboration between tenants and landlords has also played a role in reducing the impact of the general uncertainty in the market. Landlords have increasingly offered flexible lease terms featuring shorter durations, renewal options and break clauses which enable tenants to navigate uncertain trading conditions, particularly at the beginning of a lease. Incentives offered to tenants have also been varied and tailored to individual tenant needs helping balance cash flows and occupancy goals. Cooperative leasing culture was instrumental in balancing cost pressures while keeping retail spaces tenanted and commercially viable.

The sustained investor appetite over the past few years, although perhaps not at the same levels seen during the previous lower interest rate environment, suggests an underlying confidence in retail property values and fundamentals despite the broader economic challenges.