The Australian property market is on the cusp of significant change as we approach 2025. Industry professionals and landlords are witnessing a continued rise in enquiry volumes and shifting tenant cycles, trends that are set to shape the landscape in the coming year.

Our building consultancy is gearing up to meet increased demand for due diligence services, driven by market conditions, tenant movements, and regulatory changes.

What's on the Horizon for Building Consultancy in 2025

With asset values nearing the bottom of the cycle, the cost of debt high, and government efforts to reduce inflation, the market is poised for increased activity. Our building consultancy anticipates a strengthening in due diligence enquiries, particularly in commercial and alternative asset markets. 

Construction industry insolvencies are a growing concern, impacting project quality and timelines. According to the Australian Securities and Investments Commission (ASIC), there were 1,284 construction insolvency appointments from July 2022 to April 2023, a significant increase from the previous year. This surge adds pressure on construction quality, prompting a higher demand for independent building inspections and advice.

Tenant movements are also influencing market dynamics. Our building consultancy services will play a crucial role in advising on lease negotiations, make good assessments, and ensuring compliance with building standards.

Sales and Acquisitions: Slow but Gaining Traction

Nationally, commercial and industrial sale volumes have been low, partly because asset valuations have not yet reached their lowest point. Investors are hesitant to meet vendors' price expectations, resulting in slower transaction rates. However, certain asset classes are showing signs of activity.

The retail sector, particularly shopping centres, is experiencing a resurgence. CoreLogic reports indicate an increase in retail property transactions over the past year, with a notable rise in due diligence enquiries. Our building consultancy has been involved in significant transactions nationwide, providing technical assessments for both vendors and purchasers.

Alternative markets such as private healthcare, childcare, aged care, and student accommodation are attracting investor interest. Despite limited asset availability, there has been an uptick in technical due diligence enquiries in these sectors. This trend suggests investors are diversifying portfolios in search of stable returns outside traditional commercial and industrial assets.

International investor activity has shifted, with a reduction in offshore client enquiries. This decrease may be attributed to global economic uncertainties and shifting capital markets, affecting cross-border transactions.

Data Centres: The Next Investment Frontier

Data centres are emerging as a promising investment avenue. Real Estate Investment Trusts (REITs) that traditionally focused on commercial and industrial properties are now exploring opportunities in the data centre market. The demand for data storage and processing facilities is growing, fuelled by increased digitalisation and cloud computing needs.

Investment in data centres is primarily focused on constructing new facilities due to limited opportunities to acquire existing centres. Our building consultancy is receiving more enquiries about due diligence processes for data centre development, highlighting the sector's potential and the need for specialised technical expertise.

Tenant Movements and Make Good Assessments

Over the past year, there has been notable movement among commercial and industrial tenants. Our building consultancy has been heavily involved in landlord make good assessments and advisory services across multiple tenancies. Interestingly, most of these engagements have been on a smaller scale than traditionally experienced.

In the office market, there is an increase in tenants occupying spaces under 1,000 square metres either relocating or negotiating lease options. Similarly, in the industrial sector, the average size of tenants moving has decreased to between 2,000 and 3,000 square metres, a shift from previous engagements involving over 10,000 square metres.

Despite these trends, new construction of industrial assets along the eastern seaboard remains robust. Areas like Western Sydney's Aerotropolis near Badgerys Creek/Kemps Creek are witnessing significant development activity. Our building consultancy is conducting pre-lease condition reports for major developers, indicating sustained interest in these regions.

Increase in Building Inspections and Regulatory Compliance

Regulatory changes are impacting the volume and nature of building inspections. In New South Wales, the Strata Building Bond and Inspections Scheme (SBBIS) requires developers of new apartment buildings four storeys or higher to pay a building bond to NSW Fair Trading.

Currently set at 2% of the total contract price, this bond will increase to 3% from November 2024. A change has been made to the operation of the Strata Building Bond and Inspections Scheme (SBBIS) under the Strata Schemes Management Regulation 2016.

The change will defer the strata building bond increase until 1 July 2025. The increase from 2% to 3% will apply for buildings with new strata plans that do not have home building compensation insurance (Part 6 Home Building Act 1989). 

Building consultancies approved as inspectors under the SBBIS have seen an increase in enquiries, although the overall volume of new residential unit constructions has decreased. The scheme, operational since January 2018, aims to improve building quality and protect owners from defects. High construction costs in recent years have contributed to a slowdown in new residential projects, potentially affecting future demand for inspection services.

Planning changes, such as the introduction of Transport Oriented Development legislation in NSW in May 2024, have initiated early-stage projects. These developments are expected to influence market dynamics and require specialised consultancy services to navigate the regulatory landscape.

Conclusion

As we move towards 2025, industry professionals and landlords must adapt to evolving market trends. The continued rise in enquiry volumes and shifting tenant cycles are driving demand for building consultancy services. With market conditions favouring increased due diligence, regulatory compliance, and strategic tenant negotiations, our consultancy is gearing up to meet these challenges.

Investors and landlords should remain vigilant regarding construction industry insolvencies and their implications on project delivery and quality. Diversification into alternative asset classes and emerging sectors like data centres offers potential opportunities but requires careful technical assessment.

In this dynamic environment, collaboration between industry stakeholders and our building consultancy will be crucial. By staying informed and responsive to market changes, professionals can navigate the complexities and capitalise on the trends shaping the property landscape in 2025.

By Chris Barker Knight Frank Partner, Head of Building Consultancy, Australia