Your 2020 commercial property outlook
Cheap finance, a strong leasing market, and global instability made Australian commercial property attractive for investors in 2019.
While residential property saw high levels of instability and then a rapid recovery following the federal election in May, commercial property went from strength to strength. As we start the new decade, it is looking more of the same in 2020.
Office demand to continue with flow-on to decline in yields
Office vacancies continue to fall. The Melbourne and Sydney CBDs now have particularly low vacancy rates while even a high vacancy city like Perth is seeing declines. In 2020, we should see vacancies remain low, despite a number of new buildings being completed.
Although yields are now very low, positivity in leasing conditions, as well as a lot of money looking to buy commercial property, should lead to continued declines. Capital growth for office property will continue in 2020.
Industrial to remain hot property
Industrial is my favourite commercial property type and it will continue to be my number one in 2020.
Demand for industrial property from buyers and tenants remains red hot. This is largely to do with the fact that industrial property is the main beneficiary from technological change with online retailing continuing to have the biggest influence on this property type.
Getting all those parcels to shoppers requires not only large scale warehousing on the outskirts of our capital cities but also smaller warehouses in inner urban environments.
Mixed results for retail
Black Friday was kind to Australia’s retail trade figures in November, however, retailing remains a tough environment. The announcement of store closures continues, and retailers continue to monitor their footprint with many consolidating store numbers or reducing store sizes.
While it is easy to be negative about bricks and mortar retailing, there are some trends that will benefit retail property.
The first is that growth in luxury retail continues and this will benefit many CBDs, as well as anywhere that wealthy tourists and locals shop.
The second is that growing density in our capital cities is creating more demand in retail strips close to new developments. This includes both convenience retail (e.g. supermarkets), as well as cafes and restaurants.
The third is the movement of bulky goods retailers to reduce footprint. While this is bad news for large format centres, it has created additional tenants for regional shopping centres and, in some cases, retail strips.
Site sales and new development is meant to strengthen this year. Picture: Supplied
Site sales and new development to strengthen
The slowdown in the residential sector was bad news for site sales and the high prices paid by many developers for sites led to a number of problems in 2019.
In particular, the number of distressed site sales on realcommercial.com.au increased in the second half of the year.
2020 should be a much better year. The established housing market is now seeing price growth and there are some early signs that overseas buyers are returning.
In November, there was a pick up in building approvals. Interest in build-to-rent is growing in momentum and, for some developers, it provides an alternative to the traditional build-to-sell model. All this will be positive for sales of development sites.
Australia to remain a preferred market for global capital
We know Australia is a pretty nice place to live, however, it is also a safe place to invest. There is no shortage of offshore funds, but they are increasingly finding it hard to find markets in which to invest.
Australian commercial property ticks a lot of boxes – investing in Australia provides little sovereign risk, the economy is growing and there are strict planning controls.
Tenant demand remains buoyant and, for some buyers, the weak dollar makes buying more attractive.
All of this is unlikely to change in 2020.
