Multi-use and industrial property in the spotlight as lockdown’s end comes into sight

The outlook for Melbourne’s commercial property market in the near to medium-term remains upbeat.

Based on experience, demand for commercial spaces should build as the lockdown’s end comes into sight.

Anne Flaherty, an economist with REA Group, says lockdowns are clearly disruptive for business - and also for the commercial real estate industry selling and leasing properties.

But Melbourne’s experience in 2020 could hold some clues for what lies ahead in the next six months or so, she adds.

“Some familiar trends are already emerging,” Ms Flaherty says.

“First, the impact of lockdowns differs by asset class. During Melbourne’s second lockdown, office, strip and CBD retail suffered the largest falls in demand on, both from buyers and occupiers.

“By contrast, assets such as industrial, childcare and large format retail proved resilient. Behaviour on over the past month points to these same trends in Sydney.

Another lesson learned from Melbourne is that lockdowns impact the market to lease commercial property more than the market to buy, says Ms Flaherty.

“While searches to buy commercial property did fall during last year’s lockdown in Melbourne, the magnitude of the decline was less than that seen in the leasing market. Searches to rent commercial property in Victoria fell by 8.5 per cent between the June and September quarters last year, compared with a decline of 5.7 per cent in searches to buy.”

Nelson Alexander’s Commercial Property Team has tracked sustained buyer interest this year, particularly for inner-city properties in prime locations that lend themselves to multiple uses.”

In the current climate, prospective vendors need to put in place careful and professional management systems for their properties in order to maximise returns from a sale.

The value of most commercial properties correlates with the lease on the property.

If a commercial property becomes vacant, or the lease is about to expire, the value of the property would usually be expected to fall. In contrast, any price falls associated with residential properties are generally less dramatic and usually happen progressively over a longer period of time.

Ms Flaherty notes that restrictions limiting physical inspections, uncertainty around the length of lockdowns and timelines for reopening have caused many businesses to delay leasing decisions.

Changing density limits and the ongoing risk of unpredictable snap lockdowns are also a challenge for businesses when determining how much space to lease.

“Despite the ongoing challenges in the sector, investor confidence in commercial property has been creeping back, even for the harder hit asset classes,” she says.

Other analysts are tracking similar trends.

Most available data shows that shops and offices have seen vacancies rise.

But the opposite has occurred in the industrial and logistics sector. Across Australia’s capital cities, industrial vacancy fell to a record low of just 2.2 per cent over the first half of this year, according to CBRE’s Industrial Vacancy Report.

According to Colliers International Research, a record level of industrial space was leased last year, which has been a key factor in the fall in vacancy rates.

Demand has not slowed, and Colliers predicts Australia is well on track to see higher levels of take-up this year.

E-commerce has been a significant driver of the increased demand for space, with last year’s lockdowns accelerating growth in online retailing. A booming construction sector buoyed by government infrastructure spends and the HomeBuilder grant have also been contributing factors.

Searches to lease industrial property on increased by 20 per cent year-on-year - a major sign of growing occupier demand. Meanwhile, searches to buy an industrial property have seen even stronger growth, up 45 per cent over the same period.

Higher search volumes have corresponded with higher transaction volumes and more than $6 billion worth of industrial assets transacted over the first half of 2021 alone, according to Real Capital Analytics.

This was the highest level of industrial sales recorded during the first half of a calendar year in more than a decade and accounted for 36 per cent of all commercial transaction volumes.

Overseas buyers were key drivers in the rise in industrial sales, making up a large 59 per cent of volumes. This was the highest proportion of industrial sales attributed to overseas buyers on record, up from 26 per cent last year and 23 per cent in 2019.

In contrast to some other types of commercial real estate, Australian industrial property has seen both rents and land values rise over the past 12 months, with a growth forecast set to continue.

Demand from e-commerce is also expected to grow. Australia remains well behind other countries when it comes to online retailing, comprising just 9 per cent of total retail spend compared with 27 per cent in Britain and 14 per cent in the US. This room to grow is being seen as an opportunity by foreign investors.

The increased interest in Australia’s industrial and logistics sector from overseas buyers is placing upwards pressure on land values.

According to CBRE, industrial land values across Australia increased by 11.6 per cent over the 12 months ending March 2021, while yields shed 57 basis points to average 5.15 per cent.

The REA Group’s Ms Flaherty says the potential to earn a 5 per cent yield in a market with falling vacancy and rising rents is appealing.

“Demand for Australian industrial assets from foreign investors is unlikely to abate any time soon,” she says.

If you’d like some further information on investment or management, please contact Nelson Alexander’s Commercial Property Team on 03-9419 5511 or complete the form below.

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