2020 commercial review: markets adjusting to new reality
2020 commercial review: markets adjusting to new reality
What a difference a year makes.
In 2019 a record $42.6 billion of commercial property deals was transacted on Australian shores, a 22 per cent increase in the value of transactions from 2018.
The unforeseen, unprecedented and unwelcome pandemic that descended on the world in 2020 changed everything, including Australian commercial real estate.
This year, the value of commercial property deals declined 61 per cent as compared to 2019, with owners holding off selling assets through the pandemic.
The pain has not been spread evenly, either by market sector or state.
Office and retail, particularly in Sydney and Melbourne, have borne the brunt of the pandemic’s effect on the way we live and move.
Industrial and logistics markets have proven more resilient, as e-commerce has flourished and warehousing has been in higher demand.
Data from JLL Research shows the Melbourne office vacancy rate jumped 8 per cent to 11.3 per cent and the Sydney vacancy rate rose 4.3 per cent to 10.2 per cent.
As offices and retail shoppers vacate, new and recently completed stock continues to enter the system.
Across the country Western Australia’s commercial environment largely staved off the worst effects of COVID-19 thanks to border closures that allowed the state to function with a degree of normality – if living in a vacuum can be deemed normal.
Ray White Commercial head of research Vanessa Rader said that while the commercial property market has undeniably seen a decrease in occupation and demise of some businesses, which ultimately resulted in higher vacancy rates, Perth’s ability to rebound has been outstanding.
“2020 was tipped by many as a year of prosperity for Western Australia as its sound economic fundamentals and an increased output from the mining sector continue to contribute largely to Australia’s GDP,” Ms Rader said.
“We see some markets and asset classes faring better than others, but the strong demand for commercial property across Perth from local and interstate buyers is testament to the anticipated longevity of commercial property in the state.”
Perth’s retail strips have been holding their own, with some locations remarkably recording a reduction in vacancies over the last 12 months.
JLL head of research Andrew Ballantyne borrowed from the Queen in describing 2020 as annus horribilis but said Australia was well placed for a sustained economic recovery in 2021.
“We believe six key idiosyncratic risk factors influence real asset selection – location, asset characteristics, covenant, WALE (weighted average lease expiry), capex requirements and rent profile relative to market,” he said.
“In times of uncertainty, real estate investors gravitate towards investment opportunities with low risk profiles.
“As we moved through 2020, investment activity in the industrial and logistics sector remained firm, while multiple capital sources competed for office assets with long WALEs and convenience retail.”
Mr Ballantyne said Australia and New Zealand were viewed as the model for the management of a health crisis.
“Over the next decade, Australia and New Zealand are projected to be two of the strongest performing mature economies, which will attract a diverse range of capital sources to investment opportunities.”
He added that greater confidence in the economic growth trajectory will lead to an improvement in office and retail leasing enquiry and activity.
“However, leasing markets will remain challenging and vacancy pressures in some geographies will exert downward pressure on effective rents.
“The industrial and logistics leasing market will continue to remain healthy with the expansion of e-commerce operators, third-party logistics (3PLs) and organisations related to the healthcare sector.”
Ray White Real Estate’s commercial research also suggested a turnaround in sentiment could be looked forward to in 2021.
The weight of funds in the marketplace seeking a secure home in (commercial) property continues to raise enquiry levels and achieve outstanding results for vendors, their Between the Lines report concluded.
“Much of the uncertainty which plagued quarters two and three have been sidelined with an increase in activity during quarter four,” the report said.
“Our preliminary results from prior weeks continue to be updated, achieving new highs for the year and outstanding results across values and yields.
“This week we have recorded $195.9 million in early sales data dominated by activity in New South Wales, while more transactions have been completed by funds, institutions and developers during the tail end of the year, the sub $50 million market continues to be driven by private investors.”
Australia’s industrial and logistics market actually outperformed in 2020, despite headwinds created by COVID-19 – with east coast leasing volumes (in total sqm) for the year exceeding those recorded in 2019.
Vacancy rates are now at all-time lows, 1.5 -1.8 per cent for core product on the east coast.
Cameron Grier, CBRE’s Regional Director, Pacific - Industrial & Logistics, Investor Leasing, said Australia’s e-commerce take-up still had a way to go before catching up with other parts of the world.
“Even though Australia went from 11 to 15 per cent e-commerce penetration rates this year alone, we are still well behind other global cities,” Mr Grier said.
“Due to this further rise in e-commerce activity, we anticipate increased demand will equate to an additional 350,000sqm of industrial and logistics facilities each year in Australia.”
CBRE’s Chris O’Brien, Executive Director Asia Pacific - Industrial and Logistics, said market sentiment remained at record highs for industrial and logistics product.
“Across Australia and New Zealand there has been in excess of approximately $6 billion of industrial and logistics product transacted in 2020.
“The low interest rate environment, growing last mile/e-commerce thematic, strong underlying fundamentals and substantial weight of global capital seeking Australian industrial product will continue to fuel pricing.
“We anticipate 2021 will see continued strong demand for industrial and logistics product with high transaction volumes and potential yield compression.”
Asia Pacific investment
Australia is not alone in the region in struggling with the new commercial landscape.
Real Capital Analytics noted that sales of commercial property across Asia Pacific fell by 38 per cent in the third quarter of the year.
But Australia remains an attractive real estate investment destination for offshore capital sources.
Investors are attracted to strong GDP growth, liveability attributes that support population growth, transparent real estate markets and, importantly for core investors, low volatility of returns through the cycle.
A JLL surveyed of top investment leaders from 38 global and regional investors on how COVID-19 is impacting their strategic investment decision-making.
One of the questions provided to investors was a view on their investment intentions for major Asia Pacific geographies through 2021. The results for Australia were positive, with 50 per cent of investors planning to increase their exposure and only seven per cent looking to down-weight their real estate holdings in Australia.
“On the assessment of population growth and GDP outlook, Australia remains attractive relative to other mature economies,” JLL’s Mr Ballantyne said.
According David Howson, State Director of Office Leasing at Savills Australia, the Brisbane office market has seen quite the mood swing throughout 2020, with the early stages of the year full of promise and enthusiasm, followed by the challenges presented by COVID and the now infamous working from home debate.
“Fortunately for Brisbane, the direct impact of COVID-19 to our city was very limited, thus allowing a relatively early opportunity to return to the office,” Mr Howson said.
“While the Brisbane environment was more fortunate than most, many continued to work from home and returned worker occupancy was still sitting at the mid 60 per cent of pre-COVID-19 numbers in November, a sure hangover from effects on the ground with business HQ’s typically located in NSW and Victoria.
“This also signalled that while things were returning to normal, there remained a reluctance to return to prior work practices and the adaption of a new work/life balance was in the works.
“The good news is that the city is the fullest we have seen since the pandemic hit — activity is at an all-time high for the year and there is a strong feeling of excitement for what 2021 has in store for the office leasing market.
“We expect to see a continued lift in momentum, as the “workspace of the future” becomes clearer and those that delayed decisions, due to pandemic related uncertainty, start to activate their plans for the future.”