There is a particular rhythm to how markets treat states, cities and asset classes that have fallen out of favour. First there is the reasonable concern. Then the reasonable concern hardens into consensus. Then the consensus hardens into a kind of received wisdom that everyone repeats, very few people examine, and almost nobody updates as the facts on the ground begin to change.

Victoria has been living through that final phase for a while now. The story has been simple and largely uniform. Highest taxes in the nation. Most indebted state. A capital city that locked down longer than almost anywhere on earth. A property market that underperformed Brisbane, Perth and Adelaide for years. An office market that became the punchline of every commercial real estate panel.

Most of those concerns have a basis in reality. Victorian net debt is real. Land tax changes have hit investors. The Melbourne CBD office vacancy rate is genuinely elevated. None of this should be hand waved away.

But this week, between a state budget that returned to surplus, a federal interest rate decision that took the cash rate back to its previous cycle peak, and a flow of commercial property data that has been quietly improving for two halves in a row, something is starting to shift. Not loudly. Not in a way that is going to make front pages. But in a way that long term investors should pay attention to, because the most useful turning points are almost always the ones the market is too tired to notice.

The state budget did something the market did not expect

On Tuesday, Victorian Treasurer Jaclyn Symes handed down a 2026-27 state budget that delivered an operating surplus of $700 million in the current year, rising to $1 billion in 2026-27 and $2 billion by the end of the forward estimates. Net debt as a share of the economy is projected to be lower in four years than it is today. That is the kind of fiscal trajectory that quietly does a lot of work over time.

The budget also confirmed continued spending where it matters for an investment thesis. A record $32 billion for health, $19 billion for education, $1 billion for community safety, and an $860 million investment in the Social Housing Growth Fund to deliver more than 7,000 social housing homes. There is half price public transport for the rest of 2026 to ease cost of living pressure, $459 million for skills and TAFE, and continued infrastructure spending that will keep flowing through the economy for years.

Now, none of this turns Victoria into an investment paradise overnight. The starting position on debt and taxes still matters. But three things are worth noting.

First, returning to surplus while every other east coast state is not is not nothing. It is the kind of thing a credit rating agency notices, even if equity markets do not.

Second, the state has now grown its economy faster than any other state over the past decade and added more than 26,000 jobs in the past year. More than 123,000 new businesses have set up in Victoria since June 2020, a 20 per cent increase, the highest growth rate of any state. People and capital, slowly, are still showing up.

Third, and this is the part the headline writers have not quite caught up with, the policy mix is starting to look more like late cycle repair than mid cycle deterioration. Surplus, savings, infrastructure pipeline intact, population growth outpacing housing supply. That is not a story of decline. That is a story of a state grinding its way back through the cycle.

The interest rate cycle is also doing something interesting

Yesterday afternoon, the RBA lifted the cash rate by 25 basis points to 4.35 per cent. It was the third hike of 2026 and it has effectively unwound the three cuts of 2025. The cash rate is now back at the previous cycle peak. Westpac thinks there could be two more.

That sounds like an obviously bad backdrop for property. And in the very short term, it is a headwind. Higher cash rates mean higher debt costs, more cautious underwriting, and slower transaction velocity at the margin.

But here is the thing the panicked headline misses. Office assets across Australia have already repriced. Yields have already expanded by around 206 basis points from the previous trough. The risk premium on prime metro office over 10 year bonds is currently around 295 basis points. In the last two cycles where bond yields rose enough to push cap rates wider, the spread had to compress to something closer to 138 basis points (in 2007-08) or 270 basis points (in 2022-23) before yields began to soften further.

In other words, much of the rate pain has already been priced in. The further cap rate softening from here, if it happens, is likely to be marginal on quality stabilised assets, not another lurching repricing event. The big move has already happened. What investors have done is rebuild a much wider buffer, and that buffer absorbs a lot.

The risk in markets is not highest when everyone is worried. It is highest when nobody is. By that test, Victorian commercial property is probably one of the more emotionally derisked corners of the Australian investment universe right now.

Melbourne office is showing the patterns of a market that is bottoming

This is where the data gets interesting, and where the work being done by the Colliers Office Middle Markets team is genuinely useful.

In the Melbourne CBD, transaction volumes in 2025 reached $319 million across nine assets in the $10 million to $150 million bracket. That is up on 2024, and it is being driven by a meaningful change in who is buying. In 2024, developers and value add purchasers accounted for 16 per cent of transactions. In 2025, they jumped to 40 per cent.

That is exactly what you tend to see when sophisticated capital decides a market has overshot to the downside. Patient buyers stop trying to time the absolute trough and start buying assets they believe they can reposition into the next cycle. They are not buying because the news is good. They are buying because the price is right, and they understand the timing of rents, vacancies and supply in a way that does not depend on macro permission.

The Melbourne CBD Fringe and St Kilda Road corridor tells an even sharper story.

Investment volumes in the CBD Fringe rebounded to $189 million in 2025, up 17 per cent year on year, with 94 per cent of activity concentrated in the second half. That is not a market sliding further. That is a market where buyers have decided the bottom is in and are deploying.

Domestic high net worth investors and family offices accounted for 52 per cent of investment volumes in the CBD Fringe in 2025, up from 26 per cent in 2024. These are not tourists. These are people who live in Melbourne, drive past these buildings, and have decided the entry point is attractive enough to commit serious money. The 417 St Kilda Road sale to Solomon Lew at $86 million on a 5.55 per cent yield in September 2025 is the kind of transaction that does not happen unless a credible buyer has decided the cycle has turned.

In Melbourne metropolitan, the picture is similar but stronger. Nineteen assets traded in 2025, totalling $475.9 million. That is more than double 2024, and the highest annual level in five years. Developers drove 39 per cent of activity, again the classic signature of a market where smart capital has decided to buy the dip.

Why this matters for long term investors

The temptation, when reading any of this, is to look for a single clean answer. Is Victoria turning around or not? Is Melbourne office a buy or a wait? Will the next rate move help or hurt?

That is the wrong frame. Cycles do not turn on a single date. They turn through a sequence of small, almost boring observations that, taken together, look very different a year or two later than they did at the time. Vacancy rates that stop getting worse. Transaction volumes that start to pick up. Buyer composition that shifts from forced sellers to patient acquirers. Rental incentives that stop expanding. Supply pipelines that thin out. Population growth that keeps showing up. State finances that quietly improve.

Most of those signals are now visible in Victoria. They are not screaming. They are not unanimous. But they are present, and they are accumulating.

For long term investors, that matters in three practical ways.

First, the time to think about an asset class is usually not when everyone agrees it is great. It is when the consensus is exhausted, the marginal seller has left, and quality assets can be acquired at prices that bake in a lot of bad news. Melbourne CBD Fringe and St Kilda Road, in our view, look closer to that point than most observers acknowledge.

Second, the higher for longer rate environment that everyone is now bracing for has a counterintuitive feature for office. It delays new supply. Construction costs are too high, debt is too expensive, and feasibilities do not work for new builds. That means the existing stock of high quality, well located assets becomes more valuable, not less, as rents grow into the supply gap. Colliers makes this point explicitly in its 2026 review, and the structural logic is sound. When new supply is choked off, owners of good existing assets benefit.

Third, the Victorian budget reinforces rather than undermines the long term thesis. Continued infrastructure spending, ongoing population inflows, and a return to surplus are not the conditions for a state that is heading into deeper trouble. They are the conditions for a state that has been working through a hard period and is starting to come out the other side.

What could go wrong

It would be careless not to flag the risks honestly. The cash rate could go higher than 4.35 per cent. Westpac is forecasting it. If the Middle East situation escalates further and oil pushes through US$120 a barrel for a sustained period, the RBA may have very little choice. Higher rates for longer compress capital values across all property and would delay the cyclical recovery rather than accelerate it.

The November state election creates policy uncertainty. Polls are tight. A change of government, or even a hung parliament, could shift land tax, infrastructure priorities or planning frameworks in ways that matter for property investors.

Office is also not a single asset class. Buying the wrong building at any cap rate is still a way to lose money. Quality, location, tenant covenant and lease structure matter more in this part of the cycle than they do in a rising tide.

And it is worth being honest that bottoms are easier to identify in retrospect than in real time. The data is consistent with a turn. The data is also consistent with a market that is forming a base before another leg down if global conditions deteriorate further. Conviction should be calibrated to that uncertainty, not to wishful thinking.

TAMIM Takeaway

The most interesting opportunities in markets are rarely loud. They tend to form in places that have been written off, in moments when most observers have moved on, and in assets that the consensus has decided are uninvestable.

Victoria has spent the last few years collecting almost every negative narrative the Australian commercial real estate market has to offer. Some of those narratives were earned. Some were inherited. All of them are now reflected in pricing. Quietly, the data has started to move the other way. A budget back in surplus. Population growth still outpacing supply. Office transaction volumes that have rebounded across the CBD, the Fringe and the metropolitan markets. Sophisticated buyers, including domestic family offices and developers with long memories, deploying capital into the very assets the market has stopped paying attention to.

For long term investors, the practical question is not whether the next quarter will be smooth. It will not be. The cash rate may go higher. The election may add noise. Some buildings will continue to underperform. The practical question is whether the price you pay today, for quality assets in a market that has done most of its hard repricing, is one you will be glad you paid in 2030.

We think the answer, increasingly, is yes.

That is not a call to chase. It is a reminder that the best long term entries usually feel a little uncomfortable at the time, and almost obvious in hindsight. Victoria, and Melbourne commercial office in particular, is starting to fit that pattern.