Overview

• Despite a rapidly recovering economy and record high business conditions, the recovery in the local commercial property market continues on a slow burn. In Q1’20, the NAB Commercial Property Index lifted for the third straight quarter, but remained negative (-22 pts) and well below average (-1 pt).
• Sentiment improved in all sectors, but remains disparate with Industrial the only sector to weather the challenges of COVID, with sentiment reaching a survey high +42 pts. Sentiment in Office (-30 pts) and Retail (-41 pts ) is still very weak, with CBD Hotels continuing to under-perform (-60 pts) amid ongoing challenges facing the tourism sector. Overall market sentiment improved across the country, but was also negative in all states bar QLD (+8 pts).
• Overall confidence edged higher, with the 12-month measure rising to -6 pts and 2-year measure to +10 pts, suggesting recovery will remain slow with positive outcomes not anticipated until 2022. Confidence is being underpinned by Industrial (which lifted to survey highs), where the pandemic has created boom conditions due to demand for logistics and warehousing. COVID is still weighing on Office (-16 pts in 12 months), but the 2-year measure turned positive (+11 pts) likely reflecting vaccine rollout and more office workers expected to return to work. Confidence in Retail and CBD Hotels is negative.
• Expectations for capital growth are highest in Industrial (3.1% in 12 months and 3.5% in 2 years’ time). Office values are expected to fall -0.4% in 12 months and grow 0.3% in 2 years’ time (with QLD leading the way). Retail, values are tipped to fall -1.4% and -0.5%, with CBD Hotels weakest (-3.9% & -3.1%).
• Office vacancy rose to a survey high 9.8% nationally in Q1. It rose in all states (except WA) and is expected to remain elevated at 9.8% in 12 months’ and 8.8% in 2 years’ time, with above average vacancy in all states bar WA. Amid strong demand, Industrial vacancy fell to a survey low 4.6% in Q1, with shortages most apparent in the Eastern seaboard states.
• The outlook for rents is mixed. In the next 1-2 years, rents are expected to fall most in Retail (-3.0% & -2.2%), with negative returns across most of the country. Higher vacancy continues to impact Office rents (-1.7% in 12 months and -0.4% in 2 years’ time), with the outlook weakest in VIC and NSW. Industrial rents were however revised up (2.1% & 2.9%) and tipped to grow in all states bar SA/NT, with the Eastern states out-performing.
• On the development front, an above average 86% of developers plan to start new works within the next 18 months (from a low of 68% in mid-2020 during the height of COVID), suggesting the initial disruption to intentions caused by COVID has dissipated.
• The survey also continues to highlight a shift in emphasis among developers from residential to commercial building, with the number of developers targeting residential developments down to just 41% -the weakest result since Q1 2016 (38%), and well below the survey average (53%).
• Funding conditions continue to improve. Overall, the net number who said it was harder to obtain debt out-weighed those who said it was easier, but improved to -16 from -19 in Q4’20 (the best result since Q4’15). Perceptions of equity funding conditions also improved with the net number who said it was harder to obtain equity funding falling to a multi-year low -6. Property professionals expect debt (-10) and equity (-3) funding conditions to improve further in the next 3-6 months, bringing them back to levels last seen in mid-2015.

For further information, please see the NAB Commercial Property Survey (Q1 2021)