The NAB Commercial Property Index recovered some ground in Q3 but continued to print negative as sentiment picked up but remained relatively downbeat for office and retail property. Amid softening business conditions and subdued economic growth, confidence levels for the next 12 months also reduced slightly. Office vacancy rates tightened or levelled out across much of the country in Q3, except in Victoria where it jumped sharply to survey high levels.

Survey highlights

• With softening business conditions and economic growth subdued, commercial property market sentiment remained negative in the September quarter, with NAB’s Commercial Property Index printing at -2 index points. However, the index lifted from -11 in the June quarter as property professionals pointed to smaller falls in capital and rent growth in Office and Retail markets in Q3.
• Sentiment is still disparate across sectors. Though improving, it printed negative for Office (up 7 to -18) and Retail (up 29 to -10) property. It was strongest and basically unchanged for Industrial (+40), with sentiment in the bouncy CBD hotels sector neutral. Overall sentiment improved in all states in the September quarter but ranged widely from -24 in VIC to +52 in WA. Office sentiment improved in all states bar NSW. It also lifted in all states in the retail (except VIC) and industrial (except NSW and SA/NT) sectors.
• Confidence in the near-term was subdued with the 12-month measure easing slightly to +8 (+9 in Q2). Long-term confidence however improved to +28 (+22 in Q2). Confidence levels about the next 12 months was highest in the industrial sector but moderated for the second straight quarter to +45 (+49 in Q2). It remained lowest (and negative) for office property at a basically unchanged -6 but turned positive in Retail (+4) for the first time since Q4 2017. Confidence levels in the office sector in the next 12 months was highest in WA (+50) and lowest in NSW (-36). For retail property, it ranged from +67 in WA to -43 in VIC and for industrial property from +60 in VIC and QLD to +10 in SA/NT.
• The average survey outlook for capital growth in the next 12 months is still highest for industrial property (2.3%), with values expected to fall for CBD hotels (-2.3%), office (-1.6%) and retail (-0.7%) property. Office capital values are expected to fall in most states led by NSW (-2.8%) and VIC (-2.7%), with SA/NT (1.7%) and WA (0.5%) the exceptions. The outlook for retail is highest in WA (2.4%) and lowest in VIC (-2.8%). Industrial capital values are expected to grow over the next year in most states led by QLD (3.8%) with SA/NT (-1.9%) the exception. Property professionals on average also predict that capital values will resume growing in office (0.2%), retail (0.5%) and CBD Hotel (1.8%) markets in 2 years’ time, with industrial property continuing to out-perform (3.1%). Values are expected to grow in all state markets except office in NSW (-1.3%) and VIC (-1.0%), retail in VIC (-2.2%) and industrial in SA/NT (-0.9%).
• Survey participants estimated overall office vacancy at 11.1% in Q3 (11.2% in Q2). Vacancy fell in all states except VIC where it climbed to a survey high 14.6% (11.7% in Q2) amid the biggest supply overhangs in the country. National office vacancy is expected to fall to 10.1% and 9.3% in the next 1-2 years respectively and remain highest in VIC and WA (double digits). Industrial vacancy inched up to 3.2% in Q3, though space is still quite limited particularly in WA (1.9%). Industrial vacancy is expected to rise further in the next 1-2 years (3.4% & 3.8% respectively) amid reports of steady supply additions and moderating tenant demand. Overall retail vacancy held steady at 6.3% but is expected to ease to 5.8% in the next year, ranging from 4.6% in QLD to 7.0% in SA/NT.
• The outlook for rents remains strongest for industrial property and expected to grow 2.2% and 3.0% in the next 1-2 years respectively, with expectations highest in QLD (3.8% & 3.6%) and VIC (3.6% in both years). In office markets, property professionals on average still see rents falling -0.2% in the next year but expect them to grow 0.5% in 2 years’ time. Office rents are expected to grow in all states bar NSW (-1.4% & -0.7%) and VIC (-0.1% in both years). The outlook for retail rents is negative in the near-term (-0.2%) but expected to grow 0.6% in 2 years’ time. Property professionals see the highest returns in WA (2.8% & 3.6%), with VIC the only state where retail rents are expected to continue falling (-2.2% & -1.6%).
• A below average 44% of property developers planned to start new projects within the next 6 months, with a below average number looking to start in the residential sector (49%) but a well above average number in the industrial sector (20%). With continued interest rate stability and expectations for the cash rate to moderate through 2025, the number of property professionals who plan on sourcing more capital to fund development, acquisitions or projects in the next 6 months increased to 29% (24% in Q2).
• Perceptions about the ease of obtaining debt funding improved in Q3, with a net -14% of property professionals reporting it was more difficult than easier during the quarter, down from -24% in Q2. Perceptions about acquiring debt in the next 3-6 months also improved with the net number expecting it to be more difficult falling to -10% (-20% in Q2). Accessing equity funding was also easier in Q3, with the net number who reported it was harder halving to -11% (-20% in Q2). Looking ahead, more property professionals still believe accessing equity will be harder in the next 3-6 months, though the net number who think so fell noticeably to -7% (-17% in Q2).
• The average pre-commitment needed to meet external debt funding requirements for new developments in Q3 was steady at 55% for residential (56% in Q2) and 58% for commercial property (59% in Q2) property. Looking ahead, more survey respondents still see residential requirements worsening in the next 3-6 (-8%) and 6-12 months (-9%). More respondents on balance also expect requirements for commercial property to worsen in the next 3-6 months (-7%), but more see them improving in 6-12 months (+3%).

For further information, please see the NAB Commercial Property Survey (Q3 2024)