May 23, 2024

NAB Quarterly Australian Commercial Property Survey Q1 2024

Commercial property sentiment rebounds as disparities in office conditions grow between states

Commercial property sentiment rebounded in Q1 2024 and is now back into positive territory and at above-average levels. Confidence about the next 1-2 years has also lifted with most sectors seeing improvements. While there was a broad-based improvement in conditions, the biggest improvements were in CBD hotels and retail. Industrial edged up and remained solid, bolstered by very low vacancies and strong rents growth. Office property sentiment also improved but remained weak as disparities between states continue to grow. Office conditions were strongest in Qld followed by WA, with property developers in Qld reporting office balanced supply conditions for the first time in 5 years. However, sentiment continued to deteriorate and underperform in Vic.

Survey highlights

  • NAB’s commercial property index recovered to above-average levels in Q1, rising +13pts to +7 index points, with conditions strengthening in all sectors. The largest improvements in sentiment were in CBD hotels (+38pts to +75 index points) and retail (+16pts to -7), with smaller rises in office (+9pts to -22) and industrial (+1pt to +51) property. Office markets remained weakest by a significant margin, with all other sectors now above their long-run averages.
  • Commercial property confidence also improved, with the 12-month measure up +12pts to +15 index points and the 2 year measure up +11pts to +27. Confidence in the short and longer-term rose in most sectors.
  • By state sentiment and confidence lifted in all states except in SA/NT due to a deterioration in local office markets. WA saw the largest rise in the index (+29pts to +2 index points) due to a significant improvement in office sentiment (+41pts). Sentiment was highest in Qld (+24 index points) and lowest in Vic (-16) with NSW also negative (-2).
  • Capital growth expectations for the next 12 months and in 2 years’ time remained strong in industrial property markets (2.6% & 3.5%), with the most promising prospects in Qld (4.3% & 4.8%). CBD hotels were also expecting positive capital growth (2.3% & 1.8%), while retail property was forecast to have negative growth in the next 12 months (-0.7% & 0.5%). Office capital expectations remained weakest (-2.3% & -1.1%) with Vic weighing down the overall result (-5.3% & -2.7%).
  • Office vacancies were steady in Q1 at 10.5%, remaining well above-average (8.6%), as disparities between states continued to grow. Vacancies fell in Qld (9.5%) and WA (11.5%) but continued to climb in all other states with vacancies highest in Vic (13.0%). Office vacancies are expected to dip slightly to 10.1% next year and 9.1% in 2 years’ time. Retail vacancies rose from 6.8% to 7.0%, with above-average vacancies expected over the next 1-2 years. Industrial vacancies fell slightly, remaining well-below average at 3.2% with vacancies forecast to creep up over the next 2 years.
  • Gross rents continued to fall in office (-3.2%) and retail (-1.3%) markets but rents in both markets are expected to stabilise and begin growing in 2 years’ time. Rents continued to accelerate in industrial markets (from 2.9% to 3.2%), with growth expected to be slightly higher over the next 1-2 years (3.4% and 3.7%).
  • Most developers still plan to commence works in the next 1-6 months, though this number is less than average, but more than usual set to start in the next 6-12 months. Almost 1 in 5 developers (18%) plan to start new building works in the industrial sector, but amid ongoing sectoral challenges, a below average proportion of developers plan to start new works in the office (12%) and retail (9%) sectors. The bulk of new development is to be underpinned by land-banked stock, with less developers than usual chasing new acquisitions and refurbishments.
  • Funding conditions became less challenging and anticipate improvement in the next 3-6 months – though debt funding remains tight. Pre-commitment requirements eased for both residential and commercial properties with developers more optimistic about the next 3-6 months.

For further information, please see the NAB Commercial Property Survey (Q1 2024)