Note: JLL Research track sales transaction from 2007 to present
Source: Reuters, ASX Future Cash Rate as at 8/03/2024*, JLL Research

In periods of economic recovery, such as after the early 1990s, interest rates were raised (Q2 1994 to Q4 1994) to help curb rising inflation. However, the office market also recovered post-recession, which helped stimulate investment activity and resulted in yield compression. Similarly, from Q2 2002 to Q1 2008, the official cash rate rose from 4.25% to 7.25%, and the Australian CBD office midpoint yields compressed from 7.78% in Q1 2002 to 6.23% in Q1 2008. This period was underpinned by strong economic growth and solid office demand, driving office investment activity across the market (Figure 1).

The recent tightening cycle – commencing in May 2022 – follows from ultra-low interest rates, stemming from unconventional monetary policy to increase liquidity and flow of capital during COVID. It can be argued that the sharpest increase in rates since inflation targeting, implemented by the RBA in the early 1990s, is a reversion to the policy mean. The elevated cost of debt and structural concerns about the impact on long-term office demand because of hybrid work have resulted in investors re-pricing assets. This trend has seen the Australian office midpoint yield soften from a cyclical low of 5.06% in Q2 2022 to 6.25% in Q4 2023 (Figure 2).

Figure 2: Historical sales transaction over interest rate environment (2007 – 2025)