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Following years of strong capital value gains and low-income growth, a global commercial real estate services and investment firm is expecting a “major shift” in Australia’s commercial and residential markets due to emerging trends.
According to Sameer Chopra, the head of research for CBRE in the Pacific region, 2023 is expected to mark a “reversion of history” for the country’s real estate market.
“We expect weaker values and strong rent growth, with tight vacancy rates likely to lead to a ‘rent-a-demic’ in the industrial and residential markets.”
“Rent-a-demic”, a term coined by CBRE to depict the outlook for rising rents, will be driven by lower levels of new supply following surging construction costs.
In CBRE’s latest Market Outlook report, the global firm sees residential apartment rents surging by as much as 30 per cent over five years across major capital markets due to tight vacancies. Meanwhile, residential apartment construction in 2023 is estimated to be 45 per cent below the 2017 peak.
While the eastern seaboard cities are forecasted to experience rental growth of 4 per cent to 6 per cent per year, the “significant mismatch” between supply in inner-city apartments is seen to drive 6 to 7 per cent growth on the West Coast.
In the industrial and logistics (I&L) sectors, CBRE noted that constrained levels of supply and a country-wide vacancy rate of 0.6 per cent will help fuel “high, single-digit rental growth” in most Australian markets in 2023, with 58 per cent of the 2023 I&L development pipeline already pre-committed.
The report also highlighted the four main emerging trends and opportunities for the year, which are:
1. Easing construction costs
As labour becomes more readily available and raw material costs fall, CBRE estimates that construction costs, which have hit a 20-year high in October last year, will fall by 10 per cent to 15 per cent in 2023.
This easing in expenditures will help development projects “get off the ground” both in industrial and residential sectors, according to CBRE.
2. CBD revival
Regional markets’ price growth outperformed that of city markets in 2020 and 2021, thanks to a surge of Aussies taking advantage of the sea change and tree change opportunities, which drove down regional residential vacancies.
However, CBRE pointed out that this trend is beginning to see a reversal in 2022, with vacancies in inner cities declining by 1.8 per cent while sea change vacancies increased by 0.3 per cent.
According to a recent survey by the commercial firm, a desire by Gen Z and millennials to live in centralised areas is helping to upend the trend.
“Inner city and CBD locations are benefiting from a confluence of returning workers, international students, tourists and consumers craving buzz, as well as a growing desire by residents and workers for shorter commutes and greater in-person interaction,” said Mr Chopra.
3. The shift to premium
CBRE highlighted the trend of tenants looking to upgrade their premises, with data indicating that nearly three-quarters of the office relocation decisions in major city CBDs over the past two years have involved premises that commanded higher market rents.
For these relocations, analysis revealed the median net face rent is 9.5 per cent higher in costs per square metre compared to what may have been payable if the occupier had remained in the same premises.
While rent is a priority for tenants, CBRE’s head of office research, Australia, Tom Broderick, said data indicates other factors are taking precedence in occupier decisions.
“Relocations allow occupiers to move physically closer to their end customers. It allows them to reconfigure workplace design to attract and retain talent and also match ESG ambitions with energy and wellness offerings in the new premises. This theme should be supportive of new builds and redevelopments,” he stated.
4. Investment activity trends to shift
CBRE is forecasting that the slowdown in real estate investment activity, which started in the second half of 2022, will continue this year, with a mid-single-digit decline in transaction volumes for 2023. On the upside, activity is expected to rebound by around 20 per cent in 2023.
While the cost of funding has negatively impacted deal flow, CBRE expects investment activity to pick up as interest rates stabilise.
“With gearing in the commercial real estate industry below 30 per cent, forced selling is unlikely, with sellers instead likely to be motivated by needing funds for robust development pipelines,” Mr Broderick said.
He explained that the current slowdown in sales activity is largely due to a lack of consensus on pricing between vendors and buyers.
“With rates likely to stabilise in H1 2023, investors will have more comfort around the cost of debt, which should mean deal flow will increase towards the end of the year,” he concluded.
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