The commercial property market began 2024 with optimism. An increase in available listings led to improved sales activity, suggesting a newfound alignment between sellers and buyers. Although investment yields rose across all asset classes, causing sellers to experience losses compared to previous high valuations, market activity continued steadily. This was bolstered by expectations of one or two interest rate cuts before year's end.

However, inflation, while initially declining, took an unexpected upturn. This higher than anticipated result sparked new discussions about interest rates. Instead of the expected reduction, an increase was probable with potential cuts delayed until 2025. This shift in the economic landscape created uncertainty in the market.

As a result, both buyers and sellers adopted a more cautious approach, leading once again to a slowdown in transactions as confidence fell.

1) Retail resurgence

The declining gross lettable area retail (GLAR) per person, driven by population growth and limited new construction, is putting pressure on quality available retail space. Retail trade continues to show strength, while online spending has plateaued over the past year, indicating a growing demand for brick-and-mortar retail in our communities. However, this trend isn't uniform across all retail types or locations.

The performance of retail assets varies significantly based on location and is influenced by both local and broader economic factors. Notably, needs-based retail sectors such as supermarkets, fresh food outlets, specialised food stores, and service-oriented businesses are showing resilience. These categories are performing particularly well in smaller, convenience-focused assets such as neighbourhood and sub-regional centres.

Additionally, strip retail in bustling high streets continues to yield strong returns where occupancy rates remain high. Standalone assets with robust lease covenants, like liquor stores, supermarkets, and hardware stores, are also likely to thrive in the current market conditions.

2) New investors enter commercial market with help of buyers agents

The trend of investors diversifying from residential to commercial properties, which emerged during the pandemic, has persisted despite rising financing costs. Specialised buyers' agents have played a crucial role in expanding the portfolios of many individual and family investors nationwide.

These agents facilitate investments in assets across Australia, promoting diversification and encouraging local and interstate investments in new asset classes. Equipped with data and a long-term investment mindset, this emerging class of buyers has become increasingly prominent in the market.

They show particular interest in retail, industrial, childcare, fast food, and medical assets. As private buyers continue to dominate the current market, taking advantage of rising capitalisation rates, we anticipate this trend will persist throughout the remainder of the year.

3) Sustained demand for assets under $10 million

The commercial property market continues to see strong interest in assets priced sub-$10 million, driven by a diverse group of investors. While buyers' agents have been promoting diversification into commercial property, local market investors and owner-occupiers are also actively seeking quality investments for long-term holds.

This price segment is expected to remain a key driver of activity in the commercial marketplace, as it hasn't experienced the same level of turnover compression seen in the higher-end market. The buyer pool for these sub-$10 million assets remains robust, with savvy investors eager to pursue long-term opportunities. These include potential for redevelopment, repositioning, or strong income returns.

Owner-occupiers too continue to show interest in purchasing assets through their self-managed super funds (SMSFs), viewing these investments as a hedge against future accommodation uncertainties. This sustained demand across various buyer types underscores the resilience and attractiveness of this market segment.

4) Emerging opportunities in office sector

The office market's ongoing challenges are expected to persist in the short term, prompting some property owners who have been weathering the high vacancy storm to gradually bring their assets to market. This situation is creating potential opportunities for astute investors.

The increasing yields in this sector offer attractive prospects for those with a long-term investment horizon or those willing to undertake redevelopment or renovation projects during the current cycle, positioning themselves for an anticipated upturn in office occupancy in the coming years. While there has been a structural shift in how businesses utilise office space, the trophy nature of prime office properties is likely to drive a rebound, albeit following a more prolonged downturn compared to previous cycles.

Location remains a critical factor, with secondary assets continuing to face challenges. However, this market environment is expected to present favourable buying opportunities for private investors, particularly those targeting well-positioned properties with potential for value-add strategies or long-term appreciation.

5) Growth in residential values to help new housing developments “stack up”

The development site market has experienced a period of subdued activity in recent years, primarily due to escalating construction costs and labour shortages that have challenged the feasibility of projects. However, the landscape appears to be shifting. After a lull in site transactions during 2022/23, the past financial year has witnessed an uptick in development site investments which is expected to continue.

This resurgence is driven by several factors: a slight price compression in development sites, coupled with increasing gross realisation for residential developments. The latter is fueled by a nationwide housing shortage that continues to bolster both property prices and rental rates. Consequently, many projects that were previously on hold are now looking more financially viable.

Despite this positive trend, the industry still faces a significant hurdle in the form of limited access to builders and skilled trades, a factor that is likely to continue influencing the market dynamics in the short term.

By Vanessa Rader RWC Head of Research.

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