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How are rising interest rates, increased demand and more competition impacting the commercial market? One expert has his say.
According to Scott O’Neill, director of commercial property buyer’s agency Rethink Investing, Australia’s commercial market has been defined by two key factors in recent months: increased buyer demand and rising interest rates.
Speaking on a recent episode of Inside Commercial Property, a podcast run by REB’s sister brand, Smart Property Investment, Mr O’Neill said there is “without a doubt, more demand than there ever has been,” with this increased interest in the commercial property space “propping prices up”.
However, he revealed: “There’s not rapid price growth as there was 12 months ago [with] some markets declining.”
Mr O’Neill explained buyers with capacity to enter premium sections of the market will “get the best deals they’ve seen in two, three years because interest rates have caused better buying conditions at that range and the competition is a little thinner”.
Much like the residential property sector, where each different region experiences its own trials and tribulations, each different sector of the commercial real estate world has had varying degrees of fortune in recent months.
In the retail sector, the national weighted average rental yield is around 5.7 per cent, he said, while rents have also increased over the last 18 months even if they’ve remained “steady in the last quarter”.
“By and large retail is holding its value and rents are moving sideways. They are declining in central business district markets,” he said, adding “it’s important to distinguish the different types of retail”.
“Big box retail is having the best rental growth. Neighbourhood shopping centres probably second to that,” he explained. “And then you’ve got your strip mall and those more individual [centres] suffering a little bit because of their proximity to cities. But by and large they’ve done well outside of COVID.”
Boosting the prospects of the nation’s retail market is the 0.5 per cent month-to-month increase in retail spending between June and July, according to data provided from the Australian Bureau of Statistics. Moreover, spending is up 2.1 per cent compared to July 2022.
However, he warned not all markets are benefitting from changing social behaviours, with the office market suffering from the increasing popularity of hybrid working arrangements among Australian businesses.
Mr O’Neill stated: “We all know the value of office space. It’s not going to be worth as much as it once was. But, interestingly, the average yield in the country is 5.83 per cent.”
While the sector boasts impressive yields, vacancy rates, currently at around 14.4 per cent, are the “figure which kills”.
In his view, there will be a point in the near future where offices will “devalue enough to become in line with residential prices and they’ll gut them out and turn them into apartments”.
For industrial properties, yields are up to 5.8 per cent while rents have grown 22.8 per cent in the last 12 months.
“That’s enormous,” Mr O’Neill proclaimed.
“The reason this is not going to slow up is there’s genuine issues with supply. The demand is still there, it’s not going to slow down for years because councils are not releasing enough industrial land [and] these planning risks are flowing down into the developed level where they can’t stack up feasibility studies for a lot of these upcoming industrial projects,” he added.
“We don’t have enough industrial land, and good-quality, well-located industrial land is going to attract rental growth for the medium term. The only thing that will slow that down is if they release a lot more property,” Mr O’Neill said.
Casting a gaze towards the future, he believes the lingering threat of warfare, particularly any related to China-Taiwan relations, is a major headwind for the Australian commercial sector.
“You look back at history, what wars do, it’s not good for the economy and government will prioritise spending in certain locations,” he said, adding this could “be good for subsectors of the market [for example] Townsville, if they increase spending, that’s good for them up there”.
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