A Major Reversal is Coming to Australia's Commercial Property Markets in 2023

A Major Reversal is Coming to Australia's Commercial Property Markets in 2023

Commercial News » Sydney Edition | By Michael Gerrity | February 17, 2023 8:55 AM ET

According to CBRE's newly released annual Pacific Real Estate Market Outlook, after years of strong capital value hikes and relatively low income growth, expect a major shift in the Australian property market in 2023.

"We'll see a reversion of history in 2023," said Sameer Chopra, Head of Research, Pacific for CBRE. "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."

Lower levels of new supply, following surging construction costs, will help drive the 'rent-a-demic' - a term coined by CBRE to depict the outlook for rising rents.

CBRE foresees scope for apartment rents to grow by circa 30% over five years across the major capital city markets due to tight vacancy, with 2023 residential apartment construction likely to be around 45% below the 2017 peak.

Eastern Seaboard cities are tipped to experience rental growth of 4%-6% per annum, with growth of 6%-7% per annum on the West Coast given the significant mismatch between demand and supply for inner-city apartments.

In the industrial & logistics sector, constrained levels of supply and a country-wide vacancy rate of 0.6% - the lowest I&L vacancy rate globally - will help fuel high single digit rental growth in most Australian markets in 2023, with 58% of the 2023 I&L development pipeline already pre-committed.

CBRE's Market Outlook report also highlights a range of emerging themes and opportunities in 2023, including falling construction costs, a resurgence in CBD markets and a shift towards premium assets, as well as the outlook for investment activity.

Easing Construction Costs

CBRE is forecasting construction costs to deflate by 10%-15% in 2023 as labor becomes more readily available and as raw material costs fall. This will help development projects get off the ground in the industrial and residential sectors.

Resurging CBDs

In 2020 and 2021 there was a surge in Australians taking advantage of sea change and tree change opportunities, which drove down regional residential vacancies and led to price growth that outperformed city markets. However, 2022 saw the beginning of a reversal as inner-city vacancies fell by 1.8%, while sea change vacancies increased by 0.3%. CBRE's recent Live Workshop survey meanwhile confirmed a desire by Gen Z and millennials to live in centralized areas.

"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.

The shift to premium

A clear trend has emerged for tenants looking to upgrade their premises. A CBRE analysis shows that nearly three quarters of the office re-location decisions in major city CBDs over the past two years have involved premises which commanded higher market rents. For these re-locations, the median net face rent is 9.5% higher ($/sqm), compared to what may have been payable if the occupier had remained in the same premises.

"While rent is important, our data suggests other factors are taking precedence in occupier decisions," said Tom Broderick, CBRE's Head of Office Research, Australia. "Re-locations allow occupiers to move physically closer to their end customers. It allows them to re-configure 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 re-developments."

Investment Activity

CBRE is forecasting that the slowdown in real estate investment activity which began in the second half of 2022 will continue this year, with a mid-single digit decline in transaction volumes for 2023, before a circa 20% rebound in 2024. While the cost of funding has challenged deal flow, activity is expected to pick-up as interest rates stabilize.

"With gearing in the commercial real estate industry below 30%, forced selling is unlikely with sellers instead likely to be motivated by needing funds for robust development pipelines," Mr. Broderick said. "The current slowdown in sales activity is largely due to a lack of consensus on pricing between vendors and buyers. With rates likely to stabilize 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."

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