Overview

• NAB’s Commercial Property Index rose to +11 pts in Q1 building on the gains seen in the last quarter when the index moved back into positive territory for the first time in 2 years (+3 pts).
• The overall result was again underpinned by elevated (though mildly softer) levels of sentiment in Industrial property markets (+57 pts), where demand for logistics space continued unabated and drove accelerating rental growth.
• The recovery in commercial property market sentiment continued as Covid restrictions eased in sectors highly impacted by restrictions. The Office Index was positive (+10 pts) for the first time since the Covid outbreak in Q1 2020 (and in all states bar SA/NT). The CBD Hotels Index improved to 0 pts (-25 pts in Q4), with occupancy rates lifting as domestic and international travel resumed. Retail market sentiment while still weak at -15 pts amid ongoing structural challenges also lifted from -20 pts in Q4 to its highest level since Q2 2018.
• Forward looking indicators were more optimistic with NAB’s 12-month confidence measure rising to +19 pts (+13 pts in Q4) and 2-year measure to +29 pts (+23 pts in Q4) – with both now in line with survey averages and highest since H1 2018. Confidence is still being driven by a very strong outlook for Industrial property, with confidence in Office & CBD Hotels markets also lifting.
• Prospects for capital growth over the next 1-2 years still highest for Industrial property (led by NSW), with Office values also tipped to grow faster (led by QLD). Outlook for CBD Hotels also revised up, but property professionals less buoyant about growth prospects in Retail markets, on average predicting a small fall in the next year and flat in 2 years’ time (with returns weakest in VIC).
• Survey suggests national Office vacancy rose to 10.1% (9.9% in Q4), but will ease to 9.5% and 9.0% in next 1-2 years, with lower (but above average) vacancy in all key states. Retail vacancy also up in Q1 (7.5%) and in all states bar QLD, but will drop in next 1-2 years (7.1% & 6.4%). Industrial vacancy up slightly to 4.0% (from survey low 3.8%) but with developers reportedly unable to keep up with demand for warehousing space, vacancy very low in NSW (2.8%) & VIC (3.4%).
• Rental growth expected to resume in Office markets in next 1 -2 years (0.6% & 1.4%), with QLD leading. The outlook for Industrial rents is more positive (3.7% & 4.1%), with particularly rapid growth predicted in Eastern seaboard states where markets also assessed as “quite” under-supplied. National Retail rents however tipped to continue falling but at a slower rate (-1.1% & -0.2%).
• Survey pointing to a wavering supply pipeline, with the number of developers expecting to start works within the next 18 months falling to 80% from 88% in the previous quarter and below the survey average (85%). However, this is well above the low of 68% in mid-2020 when COVID uncertainty was rising quickly.
• Despite prospect of rising rates in 2022, a net -13% of all property professionals said it was harder to obtain debt in Q1 (-19% in Q4) and -9% equity (-7% in Q4). Looking ahead, a net -23% see debt conditions worsening in the next 3-6 months, with a net -10% also expecting equity funding conditions to worsen.
• Special survey questions also found: Covid support assistance packages for commercial rent deferrals and reductions did not have a significant’ impact on commercial property leases (4.1 pts out of 10); supply chain and shipping issues played a ‘significant’ role driving demand for warehousing space as retailers and logistics companies tried to stockpile goods to hedge against these problems (6.7 pts out of 10); and low yields are playing a ‘significant’ role in driving commercial property market sales (6.6 pts out of 10).

For further information, please see the NAB Commercial Property Survey (Q1 2022)