Why Commercial Land Values Remain Strong Despite Market Softening

Commercial land value vs property value

When we refer to commercial land values, we mean the value attributed to the land component of a site: its location, zoning, permitted uses, development potential and scarcity. This is distinct from the broader commercial property values, which include built improvements, leasing income, building condition and tenant covenants. 

The land value often sits beneath the building value and can affect the total value when redevelopment or adaptive use becomes viable. In commercial contexts, the commercial property value forecast usually hinges on both the land component and the building/income component.

Understanding this distinction is critical because even if building incomes soften or yields expand, land values may still retain support because they reflect future use potential rather than just current cash flows.

Current market softening in commercial property value trends

The broader commercial property market in Australia is showing signs of value adjustment. According to Savills Australia, office capital-values fell 12.9% year-on-year in Q3 2024 in some markets. At the same time, KPMG’s Commercial Property Market Update reports elevated uncertainty in returns across key sectors.

However, while building values are under pressure, survey data from the National Australia Bank (NAB) shows improving sentiment and expectations for growth in both rents and capital. This divergence suggests that although some parts of the commercial property cycle are weak, land values may not follow the same path.

Why commercial land values remain strong

Several structural factors support commercial land values despite market softness. The way we see it, these are not short-term anomalies, but fundamentals that continue to anchor land performance.

• Supply constraints on land parcels: In infill and high-amenity locations, land parcels suitable for commercial or mixed-use development are limited. This scarcity means competition for land persists, even if buildings struggle.
• Redevelopment and alternative use potential: Many land parcels with commercial zoning now offer logistics, last-mile, industrial conversion or mixed-use options. That potential uplifts the value beyond the income yield of the existing building.
• Construction and replacement cost inflation: When building costs rise, the value of land becomes more prominent since redevelopment becomes more expensive. In turn, land with permitted highest-and-best use retains value.
• Strategic capital demand: Even in softer markets for leased buildings, institutional and global capital seek land banking or repositioning opportunities. 

Segment-specific land value dynamics

Each commercial sector is responding differently to shifting market forces. The following insights highlight how land values across industrial, office and retail segments are performing.

Industrial and logistics land

Industrial land remains the tightest segment. Vacancy normalised from the ultra-low troughs, but demand for well-located infill sites persists, supported by logistics reconfiguration and data centre expansion. Recent commercial property value trends point to resilient land pricing through 2025 as speculative development eases and new supply is rationed by funding and planning timelines.

Construction inputs also remain elevated, which lifts replacement costs and helps anchor land values for prime, serviced sites. ABS producer price indexes show construction costs rose 3.5 per cent over the year to the September quarter 2025.

Interestingly, large-scale digital infrastructure is another tailwind. For instance, Amazon announced a multi-year, A$20 billion program for Australian data centre capacity, which significantly strengthens demand for power-served industrial land in key corridors of Victoria and Queensland.

Office and CBD fringe land

Office buildings face a slower income recovery, yet well-located sites with mixed-use or life-cycle repositioning potential continue to hold value. Market evidence suggests capital values are stabilising after a sharp correction, which reduces forced land sell-downs and supports pricing for sites with credible redevelopment outcomes. 

Where planning permits allow higher and better use, the land component can decouple from current office income. This is particularly relevant in precincts with infrastructure upgrades and active rezoning frameworks that constrain new supply elsewhere.

For example, Infrastructure Australia’s market-capacity program highlights the depth of the broader infrastructure pipeline, which tends to concentrate private development interest around transport-rich nodes.

Retail and mixed-use land

Neighbourhood-scale retail and mixed-use sites in dense catchments remain comparatively resilient, especially where daily-needs anchors, healthcare and services underpin spending.

Transaction pricing may vary deal-by-deal, but the thesis is consistent: limited new competing supply, stable occupier demand and optionality for intensification support land values relative to weaker discretionary formats. Sector-level stabilisation across commercial markets adds context to that resilience.

Commercial property value forecast and what it implies for land

Across major sectors, the direction of travel through 2025 points to stabilisation in capital values and selective rent growth. Property Council of Australia and MSCI data show early signs of bottoming after five consecutive quarters of declines, with total returns turning positive in Q1 2025. In this setting, land with credible development pathways tends to retain pricing power even if income yields remain under pressure. 

It’s important to remember that replacement cost dynamics matter. When structures cost more to deliver, developers become more selective and concentrate on superior sites, which helps preserve land values for serviced, well-located parcels. 

Capital availability is likewise improving from 2024 lows. MSCI reports a rebound in late-2024 deals and a broader recovery in 2025 transaction appetite, which supports clearing prices for strategic sites as price discovery improves.

Risks to monitor

• Supply timing risk: If deferred pipelines return quickly as rates fall, a faster-than-expected supply response could cap land upside in fringe locations. We anticipate a tempered supply profile through late 2025, but this could shift if funding conditions improve. 
• Cost volatility: Easing in materials would reduce replacement-cost support. Current data still shows positive construction cost inflation, so watch quarterly prints for a turn.
• Policy and infrastructure delivery: Delays or scope changes to transport and energy projects can alter catchment fundamentals that underpin highest-and-best use. Australia’s infrastructure pipeline is large, but delivery risks remain a factor.

What this means for investors and would-be investors

For investors, understanding what drives commercial land resilience is essential. The following insights outline practical strategies to identify, evaluate and act on enduring land-value opportunities in 2025.

• Prioritise location fundamentals over headline yield. Seek sites with transport access, utilities capacity and demonstrated tenant depth. These features are the true drivers of commercial land values through cycles. As mentioned, recent data centre and logistics commitments illustrate how utility-rich locations capture outsize demand. 
• Underwrite by replacement cost and credible exit paths. Use current cost benchmarks to test feasibility. This approach highlights whether current pricing reflects genuine scarcity or inflated sentiment. It also clarifies exit timing, so investors can determine when redevelopment or divestment would deliver optimal returns.
• Target optionality. Prefer parcels with zoning headroom or mixed-use potential that can adapt to evolving commercial property value trends. Stabilising capital indices improves the backdrop for repositioning strategies.
• Sequence risk carefully. In the industrial sector, lean toward infill and serviced land where supply is structurally scarce. In the office, focus on sites with clear planning pathways and amenities. In retail, favour dense neighbourhood catchments with daily-needs weighting.
• Stress-test capital and timelines. Transaction activity is recovering, but debt costs and delivery risks still vary by asset and sponsor. Cross-check assumptions against the latest capital-trends evidence.

How Costi Cohen helps you secure the right land-rich asset

As land values remain resilient amid shifting market conditions, investors need expert guidance to uncover genuine opportunities and avoid overexposure. Costi Cohen provides this edge through a data-driven approach that connects insight with action.

We help investors secure the right land-rich assets by combining deep market intelligence with a full-market acquisition approach. Every acquisition is informed by detailed analytics, so you get a clear view of potential and risk before you commit.

Beyond acquisition, we support clients through negotiation and ongoing portfolio optimisation. We represent across expressions of interest, auctions, direct and off-market channels to achieve the best balance of price and conditions.

If you’re ready to act intelligently on these commercial property value forecasts, connect with us today.

Disclaimer: The information in this article is provided for general informational purposes only and does not constitute financial, investment or property advice. While every effort has been made to source data from reliable and current publications, readers should seek independent professional advice before making any investment decisions. Market conditions and forecasts are subject to change without notice.