Vacancy risk is concentrated, not even
Headline vacancy figures can mislead because they average very different buildings together. Sydney's CBD office vacancy eased to 13.3% over the first half of 2026, down from 13.8% at the start of the year, on Property Council of Australia data cited by Knight Frank. Melbourne's CBD told a different story: at 18.9%, it remained the weakest-performing major office market in the country over the same period. Both figures sit alongside a genuine supply squeeze: the Property Council recorded just 176,303 square metres of new office space completed nationally in the first half of 2026, the lowest half-year total since July 2017. The recovery is concentrated in premium and A-grade towers benefiting from that undersupply, while older B- and C-grade stock in secondary precincts tends to carry vacancy well above the city-wide average. It's that gap between tiers, not the citywide figure, that should drive what an investor pays for a specific building.
Tenant default risk: a landlord usually becomes an unsecured creditor
Vacancy you can see coming. A tenant's insolvency often arrives with little warning, and when it does, a landlord's legal position is weaker than many investors assume. Once a corporate tenant enters voluntary administration, the landlord's claim for rent arrears and for the cost of the tenant walking away from the balance of the lease term is ordinarily an unsecured debt, ranked behind secured lenders and employee entitlements rather than treated as a priority claim just because the landlord holds the real asset. Mosaic Brands, the ASX-listed owner of Noni B, Rivers, Millers and Katies, shows how that plays out at scale. It entered voluntary administration on 28 October 2024, with FTI Consulting appointed as administrators and KPMG installed as receivers at the request of its senior secured lender, owing close to $250 million to a long list of creditors that included shopping centre landlords alongside inventory suppliers. Administrators told those unsecured creditors they were unlikely to recover pre-appointment claims unless a deed of company arrangement or legal action produced funds, and the four brands were wound down in stages through to mid-2025, leaving shopping centre landlords across the country to re-lease the vacated space themselves. It isn't an isolated event: trade publication Ragtrader, tracking ASIC's insolvency data, recorded 875 first-time retail company administrations in the 2026 financial year, slightly above the 871 recorded the year before. The lesson for a landlord isn't just that a major tenant can fail. It's that failure converts a rent roll into a line item in someone else's creditors' report.
Rate-reset risk: the loan you signed in 2022 isn't the one you'll refinance now
The Reserve Bank lifted the cash rate for the fourth time in 2026 on 29 September, a unanimous 25-basis-point move that took it to 4.60%, its highest level since 2011 and a full percentage point above where the cash rate started the year. That matters most for owners who fixed commercial debt near the bottom of the cycle in 2022 or 2023 and are now rolling onto new terms priced off a materially higher base rate. Savills Investment Management estimates that roughly $75 billion of Australian commercial property debt comes up for refinancing each year, and puts the resulting funding gap, the difference between what's maturing and what banks will re-lend at today's tighter loan-to-value ratios, at around $11 billion annually. Bank commercial property lending had already hit a record $415.7 billion as at June 2025, up 9.6% over the year, per Broker News, so the pool of debt eventually facing a reset keeps growing even as each loan gets costlier to roll over. An investor who comfortably serviced a loan against a 2022 rate needs to re-run that sum against 2026 repayments before assuming the numbers still hold.
The three risks rarely arrive one at a time
Each of these risks is manageable in isolation; together, they compound. A property with a short weighted average lease expiry is most exposed to vacancy risk at exactly the point a refinancing falls due, because a gap in rental income lands at the same time as a higher repayment. A tenant default partway through a loan term can turn a serviceable facility into a covenant breach overnight, since lenders typically test interest cover against rent actually received, not the rent a lease says is owed. Reviewing all three together, rather than as separate line items on a due-diligence checklist, is the difference between an asset that has been genuinely stress-tested and one that only looks fine until it isn't.
What this means before you buy
Before relying on an advertised yield, check the weighted average lease expiry and tenant covenant strength behind it, not just the headline cap rate; a short WALE or heavy reliance on a single tenant concentrates vacancy and default risk into a narrower window. If the property is sold with debt attached, ask for the loan's maturity date and stress-test serviceability at today's rate rather than the rate the current owner locked in years ago. None of this removes commercial property's upside. It simply means the risks that actually end a deal are rarely the ones written up in the listing.