The commercial property sector has faced significant changes in capitalisation rates over the past two years, with varying impacts across different asset classes. This raises some common questions: are we at the bottom of the cycle, is there more pain to be felt, or are we at 6 o'clock and in the trough phase?

The results differ notably across asset classes, providing insights into changing returns and capital growth patterns.

The office sector has been the most severely impacted and publicised, with many funds and trusts seeing major revaluations of their portfolios. Prime CBD markets saw yields move up by 112 basis points, while non-CBD markets performed even worse with a 139 basis point increase to 6.4 per cent.

This suggests not just a cyclical shift but potentially a structural change in how we interact with office spaces. Limited purchasing demand has resulted in minimal transactional evidence, further fueling the push for higher yields, while ongoing occupancy challenges raise questions about the longevity of the asset class.

Industrial property, despite being the market darling, surprisingly recorded one of the largest cap rate increases at 130 basis points. While this rate shows some volatility across states, it's clear that the historic lows achieved were unsustainable as financing costs increased.

However, strong occupancy demand and rental growth have helped maintain stable capital values in most markets. Low vacancy rates and limited new stock suggest continued stability in this sector, with rents expected to stabilise or continue growing, albeit at a slower pace.

The retail brick-and-mortar sector has experienced an unexpected turnaround after a decade of e-commerce concerns. Neighbourhood centres saw the smallest cap rate movement of just 39 basis points, while super/major regional centres experienced only a 51 basis point increase.

This stability follows a period of prolonged steady yield levels prior to the pandemic, with needs-based retailing driving particularly strong performance in neighbourhood centres. Even super/major regional centres, despite their discretionary occupier base, have shown remarkable resilience, potentially positioning retail as the new star performer in the commercial market.

In the alternatives sectors, metropolitan childcare facilities saw an 83 basis point increase to average 5.6 per cent, reflecting the impact of new supply additions despite strong government subsidies. High population gains are not expected to immediately benefit this sector, leading to some wavering demand. Boarding houses and residential blocks experienced a more modest 53 basis point rise, benefiting significantly from the housing supply crisis. This has driven rental vacancies to historic lows and supported strong rental growth, effectively offsetting the cap rate expansion and maintaining strong capital growth prospects.

The market appears to be hovering in a trough position, with recovery expected in 2025. While each asset class shows its own vulnerabilities, the significant cap rate adjustments over the past two years suggest limited future downside risk for investors.

However, the recovery trajectory may be gradual, with stable rates likely to become the new normal rather than rapid yield compression. Even as interest rate movements potentially create downward pressure on yields, the pace of improvement is expected to be measured, reflecting a more stable long-term outlook for the commercial property sector.

More RWC readings 

Are owner occupiers fueling sub $20m commercial property market? - RWC | Commo.

Positive signs for commercial property as business numbers climb - RWC

Are we at the bottom of the commercial property market? - RWC | Commo.

Canberra office markets outperform - RWC

Top 5 commercial property trends for the remainder of 2024 - RWC