What Is a Good Rate of Return on Commercial Property?

When you buy a commercial property, you’re not just buying space-you’re buying income. But how much income is actually good? A 5% return might sound solid until you see a neighbor getting 12% on the same street. The truth? There’s no single number that works for everyone. But there are clear benchmarks, hidden traps, and real-world numbers that tell you if you’re on track-or wasting money.

What counts as a good return on commercial property?

In Australia, a good net yield on commercial property typically falls between 6% and 9%. That’s the annual income after expenses, divided by the purchase price. For example, if you buy a retail shop for $1.2 million and collect $90,000 in rent after taxes, insurance, maintenance, and property management, your net yield is 7.5%. That’s solid. But if you’re only getting 4%, you’re either overpaying, undercharging, or overlooking big costs.

Why does this range matter? Because commercial properties don’t rely on capital growth alone. Unlike residential homes, where you might expect 5-8% annual appreciation, commercial returns are built on cash flow. If your property doesn’t pay for itself within the first few years, you’re taking on too much risk. Investors who chase high-value buildings in prime CBDs often forget: a $3 million office might only generate $150,000 in rent. That’s a 5% yield-and if vacancy spikes or a tenant leaves, you’re in trouble.

How net yield works (and why gross yield is misleading)

Many sellers and agents advertise gross yield-rent divided by purchase price, with no costs subtracted. That’s like advertising a car’s top speed without mentioning fuel costs. A property listed at 8% gross yield might actually deliver 5.2% net after strata fees, council rates, repairs, and vacancies.

Here’s how to calculate it right:

1. Annual gross rent: $100,000
2. Subtract: property management (5-7%), insurance ($2,000), council rates ($5,000), maintenance ($8,000), vacancies (5% of rent = $5,000)
3. Total expenses: $20,000
4. Net income: $80,000
5. Property value: $1.1 million
6. Net yield: $80,000 ÷ $1,100,000 = 7.27%

That’s the number you care about. Gross yield? Irrelevant. If you’re comparing deals, always use net yield. Otherwise, you’ll end up buying a property that looks great on paper but drains your cash.

What type of commercial property gives the best returns?

Not all commercial properties are created equal. Location, tenant quality, and lease length make all the difference.

• Medical centers: Often yield 7-9%. Tenants like GPs and physios sign 5-10 year leases. Low turnover. High stability.
• Net-leased retail (e.g., pharmacies, supermarkets): Yields 6-8%. Tenants pay all expenses (rates, insurance, maintenance). You just collect rent.
• Office spaces in secondary CBDs: 5-7%. Riskier. Longer vacancies. More competition. Harder to re-lease.
• Industrial warehouses: 7-10%. High demand from logistics companies. Especially in Melbourne’s outer suburbs like Dandenong or Laverton.
• Shopping centers (small strip malls): 6-8%. Depends on anchor tenants. If Coles or Aldi is there, you’re safe. If it’s five empty units, you’re not.

In Melbourne, industrial and medical properties have outperformed offices and retail since 2023. Vacancy rates for industrial space are below 3%. For CBD offices, they’re hovering near 14%. That’s not a typo.

What’s driving returns in 2025?

Interest rates are still higher than they were in 2020. That means lenders are stricter. Buyers who used to borrow 80% of value are now capped at 65-70%. That’s pushing investors to focus on cash flow, not speculation.

Also, inflation has changed tenant behavior. Businesses are choosing longer leases to lock in fixed rent. Landlords are responding with triple-net leases, where tenants cover rising costs. That protects your return.

And don’t ignore tax. Commercial property depreciation can give you a $20,000-$40,000 annual deduction if you have a qualified quantity surveyor. That doesn’t change your cash flow, but it lowers your tax bill-effectively boosting your net return.

Red flags that your return is too low

Here’s what to watch for:

• You’re paying more than 15x annual net rent. That’s a sign you’re overpaying. A $1.5 million property should earn at least $100,000 net. If it’s only $80,000, you’re paying 18.75x-too high.
• The tenant is a small business with no track record. If they go under, you’re stuck.
• Lease is under 3 years. Short leases mean frequent vacancies. That’s expensive.
• Building needs major repairs. A leaking roof, failing HVAC, or outdated wiring can cost $50,000-$150,000. That eats your yield.
• You’re not using a property manager. DIY management sounds cheap, but it’s not. You’ll lose rent during vacancies, miss maintenance deadlines, and waste time.

One investor in Footscray bought a retail unit for $950,000. The agent said it was a 9% yield. Turns out, the previous tenant had a 10-year lease. The new tenant paid 30% less. The yield dropped to 5.8%. He lost $35,000 in income that year.

How to improve your return

You can’t control the market, but you can control your choices.

1. Buy in areas with low vacancy. Check the CBRE Australia Industrial Report or JLL Retail Trends-they publish quarterly data.
2. Negotiate tenant-paid expenses. Push for triple-net leases. Even if you get slightly lower rent, your net yield goes up.
3. Upgrade the property strategically. Adding EV charging stations or better lighting can attract higher-paying tenants.
4. Use a specialist commercial broker. Residential agents don’t understand lease structures, outgoings, or tenant covenants.
5. Reassess every 2 years. If your tenant pays $100,000/year and the market now rents for $120,000, renegotiate. Don’t wait for the lease to expire.

What’s realistic for 2025?

If you’re starting out, aim for 7-8% net yield. That’s achievable in industrial, medical, or well-located retail. Anything below 6% is risky unless you’re counting on big capital gains-which aren’t guaranteed. Anything above 9%? Be suspicious. It might mean the property is in a bad area, has legal issues, or needs major work.

Remember: a 7% return on $1 million is $70,000 a year. That’s more than most full-time jobs. But only if you buy right.

Final tip: Compare apples to apples

Don’t compare a 20-year-old warehouse in Dandenong to a new medical center in Caulfield. Different assets, different risks, different returns. Use tools like Realestate.com.au Commercial or CoreLogic Commercial to filter by property type, suburb, and net yield. Look at 10-15 recent sales. See what’s actually leasing. Don’t trust the agent’s pitch. Trust the data.

Commercial property isn’t about getting rich quick. It’s about steady, reliable income. If you focus on net yield, tenant quality, and location, you’ll outperform 80% of investors who just chase the biggest building.