Retail and office face biggest downgrades to 2027 outlook

Despite the recent run-up in Treasury yields, we aren’t expecting a major impact on commercial real estate cap rates as we anticipate this will be merely a short-term spike in bond yields. But sentiment has weakened and this will slow the investment recovery. The bigger impact will be on the retail sector, where we have downgraded our rental forecasts given lower real income growth and the risks in 2027-28 from the bursting of the equity market bubble. Our office forecasts have also been downgraded as AI drags on office-based employment and demand is hit by the equity market correction. Overall, our forecasts have retail and apartments outperforming with returns of 6-6.5% p.a., offices at 5% p.a., and industrial at 4% p.a. We continue to believe in senior housing outperformance, predicting double-digit annual returns over the forecast, while self-storage will produce returns of just 2-2.5% p.a.