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One expert shares his take on how commercial property is expected to perform in the year ahead.
Rising interest rates topped the list of factors that commercial property investors had to weigh when devising their strategies in 2023. With rates at or near the high, a new narrative will determine investor behaviour in 2024.
Peter Vines, managing director Ray White Commercial Western Sydney, noted that though multiple interest rate hikes, high construction costs and inflation caused many investors to sell or hold their assets in 2023, the firm also saw some really strong results, and in fact was able to increase the value of property sold by 65 per cent in the past 12 months compared to 2022.
Next year, Mr Vines predicts that certain economic factors like stabilising mortgage payments and a continued upswing in tourism will push some commercial subsectors ahead of the rest. Here are his predictions for 2024.
- The year of beds and sheds
Mr Vine expects to see property assets in “beds and sheds” sectors shine across 2024. That includes property related to tourism, boarding houses, blocks of units and industrial assets.
A continuation of the 2023 trend, he explained why it’s not set to abate in the year ahead.
“Off the back of COVID we’ve seen higher business travel which has increased occupancy in hotels particularly across the CBD, with an increase in domestic and international visitors. We’ve also seen more people travel locally for staycations to avoid travelling overseas as there is still some uncertainty there, with regional locations benefiting from this,” Mr Vines shared.
As for industrial, he believes that the fundamental lack of zoned, serviced, industrial land and continued occupancy requirements will bolster the sector through the year, albeit with some expected shifts.
“While yields need to move upward in response to the rising cost of finance, and tenant demand will soften this year, rental growth will continue albeit at a lesser rate in 2024,” the commercial expert predicted.
- Fight to quality
When it comes to offices, Mr Vines believes flight to quality will continue, as demand for premium office space will be sought after even as overall office occupancy still works to return to healthy figures.
In the office market more broadly, Mr Vines commented that the outlook is “mixed”.
“Office assets and the difficulties in lowering vacancy as flexible working conditions dominate the employment discussions will put a hold on further improvements over the next year, keeping rents competitive, incentives up and pressuring yields upwards as demand to purchase dwindles,” he said.
- The battle of bureaucracy
In Mr Vines’ eyes, “there is no doubt in 2024 bureaucracy will continue to stand in the way of development opportunities”.
Though much has been made of the development potential tied to the 2026 opening of the Western Sydney Airport, the commercial real estate expert warned that expectations should be managed, as zoning is still yet to be sorted and the cost of construction remaining high.
As a result, he doesn’t see new development able to be completed by the time the airport is set to open in 2026.
- Pre-receivership rush
“There is no doubt those investors who are forced to sell in 2024 will want to control the sale, rather than going into receivership, so we will see a rise of rushed sales as a means of controlling the sale process,” Mr Vines opined.
Under these circumstances, the fundamentals of demand and supply will be more important than ever, with investors in a strong financial position aware they may be able to get a deal as more stock comes onto the market.
- Holding out for 2025
Mr Vines believes that for those feeling the financial strain, holding on to their property investments until 2025 by any means necessary will put investors in a position to thrive when interest rates return to lower levels.
“As soon as we see interest rates hold and eventually come back down, commercial property values will look to grow again,” he assured.
ABOUT THE AUTHOR
Juliet Helmke
Based in Sydney, Juliet Helmke has a broad range of reporting and editorial experience across the areas of business, technology, entertainment and the arts. She was formerly Senior Editor at The New York Observer.
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