The Australian commercial property market has experienced another difficult year, with total volumes declining by 12.3 per cent to $54.6 billion in the latest financial year. This lacklustre performance comes despite expectations of renewed confidence stemming from interest rate stability and anticipation of potential rate reductions.

While yield corrections across most sectors attracted private investor groups seeking improved returns, the persistent gap between vendor and purchaser expectations continued to limit market turnover.

The market's trajectory over the past few years paints a picture of declining activity. Commercial sales peaked in 2021/22, with nearly $100 billion changing hands. However, this figure dropped sharply by 37.6 per cent to $62.3 billion in 2022/23, coinciding with interest rate increases, before declining further this year. Despite this overall downward trend, certain asset classes have shown growth, indicating shifting confidence levels across various property types.

Industrial property has emerged as the standout performer over the four-year period, particularly during the pandemic. Although the volume of large assets coming to market decreased in subsequent years, the sector has seen significant growth recently. Industrial sales amounted to $14.6 billion (23.5 per cent of total turnover) in 2022/23, increasing to $16.8 billion (30.7 per cent of total sales) in the past 12 months.

This growth has been driven by larger institutional sales and an uptick in private buyers, particularly those investing up to $20 million. These investors, both local and interstate, have been attracted by quality yields in a market where new supply remains constrained. Low vacancy rates and promising long-term growth prospects have kept yields competitive in this sector.

Development site activity has also seen a resurgence after years of limited action. The persistent lack of supply, notably in residential and industrial markets, has spurred this revival, with activity growing to $9.3 billion. Increased confidence surrounding construction costs has contributed to this upturn, with strong growth in capital values making many projects more financially viable compared to prior years.

This trend is likely to fuel another round of construction activity in some markets, subject to labour constraints.

The retail sector has enjoyed an uptick in activity, particularly during the first half of 2024. A shortage of new supply coupled with continued population growth has sparked a renaissance in this asset class, maintaining high occupancy rates and improving future prospects. Retail sales reached $10.7 billion in 2023/24, slightly up from the previous year, with its share of total turnover growing from 17.1 per cent to 19.5 per cent over the fiscal year.

In contrast, the childcare and medical sectors have experienced change in market activity. After strong interest in recent years, buyers have become more discerning, particularly in the childcare segment. However, well-located assets with strong covenants remain attractive to private buyers seeking stable returns at competitive yields.

Geographically, the distribution of investment activity has remained relatively steady. NSW continues to lead, accounting for $22.9 billion or 41.3 per cent of total turnover, a slight increase from 38.8 per cent the previous year. Victoria ranks second, representing 26.5 per cent of the market, followed by Queensland, which has consistently accounted for approximately 20 per cent over the past four years.

Smaller markets with historically volatile performance continue to show mixed results, with some investors retreating from Tasmania, Northern Territory, and the Australian Capital Territory after strong showings in 2021/22.

While the Australian commercial property market has faced challenges over the past year, the varied performance across different sectors and regions suggests a complex landscape. The industrial and development site sectors have shown resilience and growth, while retail has seen a modest resurgence. However, the overall market continues to grapple with the effects of interest rate uncertainty after higher than expected inflation results, putting a dampener on decision making for many investors as we enter into the 2024/25 financial year.

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