Prime Is Filling. Secondary Is the Question.

The Reserve Bank's October Financial Stability Review is clear on the headline for commercial real estate. Fundamentals have continued to improve across most Australian CRE markets. There remains little evidence of financial stress among owners of Australian CRE, despite higher interest rates and elevated uncertainty.

That is useful. It is also incomplete if you stop there.

The sharper story in the market data is grade. Occupiers and capital are concentrating in prime assets. Secondary space is absorbing less, or going backwards. For anyone working with property and credit, that split matters more than the national average.

What the Review says about CRE

The Review's CRE section is measured. Valuations and rents have continued to improve across most markets. Tenant preference for prime office is supporting that segment, while lower-grade office and high-vacancy locations, including parts of Melbourne, remain weaker. Retail has risen gradually as vacancies declined. Industrial fundamentals remain strong on warehousing and distribution demand, though new supply has eased growth in valuations and rents.

Investment demand has stayed firm. Domestic volumes have been strong so far in 2026, particularly in retail and industrial. Foreign investors have accounted for close to one-quarter of transactions by value over the past year, with some overseas capital redirected toward Australian CRE.

Banks' CRE exposures have risen as a share of assets in recent years, especially into industrial. Non-performing CRE loans remain low. The watchpoint the RBA flags is competition: higher construction costs and affordability constraints have reduced the pool of feasible projects, so lenders are competing harder for the deals that remain viable. Standards appear largely unchanged more recently after some earlier easing in terms, but a further material easing would raise risk.

The industrial split

Cushman & Wakefield's Q3 Industrial MarketBeat reports put numbers on the grade story.

National logistics and industrial leasing was resilient: a little over 1.0 million square metres leased in the September quarter, and about 3.4 million square metres year to date. National vacancy was unchanged at 3.7 per cent for a third consecutive quarter.

Underneath that, prime and secondary moved in opposite directions. Prime absorbed 650,000 square metres. Secondary declined by 300,000. The national net absorption figure of about 350,000 square metres is simply the sum of those two moves.

Vacancy is also diverging by city. Perth remains the tightest major market at 2.2 per cent. Melbourne sits at 4.4 per cent after speculative completions and occupier relocations. Brisbane improved to 3.1 per cent from 3.5 per cent in the June quarter. Sydney rose modestly to 3.9 per cent. Adelaide edged lower to 2.6 per cent.

Luke Crawford, Cushman & Wakefield's Head of Logistics and Industrial Research for Australia, described growing occupier selectivity concentrating demand in prime space. In his words, planned pipelines are unlikely to translate fully into completed stock, which will keep conditions tight in the best-located precincts.

Office is telling a similar story

JLL's September quarter office research, reported on 13 October, shows the same preference for quality.

National CBD vacancy fell to 14.8 per cent, down 0.5 percentage points from 15.3 per cent in the June quarter. Four of six major markets recorded positive net absorption. Melbourne rebounded with 48,000 square metres of net absorption and vacancy down from 20.5 per cent to 19.4 per cent. Sydney extended its run of positive absorption to 11 consecutive quarters, with vacancy at 13.6 per cent, its lowest since the September quarter of 2022.

The grade gap is stark in Sydney. Over the 12 months to September, prime offices recorded 71,200 square metres of net absorption. Secondary assets recorded 6,500 square metres. Sydney CBD prime gross effective rents rose 8.3 per cent over the year. Brisbane was the weakest CBD in the quarter on absorption after a large tenant consolidation, though prime rents there still rose 11.8 per cent year on year.

Private credit sits next to the property story

The Review also notes that Australian private credit funds are more exposed to real estate, including construction and development, than their US peers. Non-bank lenders account for around 10 per cent of total business debt outstanding. Private credit has grown from a small base and banks' exposures remain limited, so the RBA does not treat it as a systemic stability risk today.

What matters practically is the funding channel. ASIC is addressing investor-protection issues around opaque valuations and uneven governance. Liaison also suggests some tightening of private credit conditions and greater sensitivity to project risk, including for some residential property developers. Systemic risk contained is not the same as funding conditions unchanged for every borrower.

What I take from it

A few observations, offered as personal views.

First, a resilient CRE sector in the FSR is not the same as every asset performing the same way. National vacancy and absorption averages can hide a flight to quality that is already visible in both industrial and office data.

Second, competition for the feasible deals is the funding watchpoint the RBA is naming. Costs and rates have narrowed the viable pool. Keeping standards sound while that competition runs is what protects the next cycle.

Third, secondary assets and weaker locations need a clearer story on tenant demand, incentives, capex and exit. The gap is not a reason to ignore secondary. It is a reason to underwrite it more carefully, and to watch private credit channels that are more exposed to construction and development.

None of this is a forecast or a call on any asset, borrower or lender. The Review says the system can absorb stress. The market data says grade is doing more of the work than the national headline. That is the part worth keeping in view.

Personal views, not financial advice.