NAB’s Commercial Property Index weighed down by fading sentiment in Office markets in Q2 as Industrial and CBD Hotels markets continue to out-perform. Amid growing economic uncertainty and higher rates, the number of developers planning to start new building works in the next 18 months now below levels seen at the height of COVID uncertainty in mid-2020. Funding (debt & equity) remained difficult in Q2 and accessing funds in the next 3-6 months now expected to be harder than any time since early-2019.

Survey highlights

• Commercial property market sentiment (as measured by NAB’s Commercial Property Index), continued to languish in Q2 with the Index inching down to -7 pts from -6 pts in the previous quarter and printing below the long-term survey average (-2 pts).
• By sector, sentiment remains elevated and lifted further in the bouncy CBD Hotel sector (+38 pts), with property professionals reporting a big uplift in RevPAR growth and solid occupancy rates. After significantly out-performing since late-2020, the Industrial index is starting to “normalise”, falling to a 2½ year low +26 pts – though still printing well above average levels as capital values and rents continue to grow on the back of structural tailwinds. The Office Index fell quite sharply (-28 pts), with property professionals reporting lower capital and rental growth. The Retail index bounced but was still very weak at -17 pts, amid rising economic headwinds and sluggish consumer spend.
• NAB is now seeing increasing signs that activity is slowing sharply after a very strong period of growth in 2022. And with rates moving higher, the risks to growth continue to rise. Against this backdrop, overall commercial property confidence levels eased in Q2, with the 12 month measure falling to -3 pts and 2-year measure to +11 pts. Short-term confidence levels are highest among property professionals operating in CBD Hotels (+25 pts) and Industrial (+22 pts) property markets, and lowest in the Office sector (-18 pts). Longer-term confidence levels are highest for Industrial property (+30 pts), ahead of Office (+10 pts) and Retail (+3 pts).
• Market sentiment was negative in all states bar QLD (+8pts) in Q2, and lowest in VIC by a big margin at (-22 pts). Property professionals in WA (+14 pts) and QLD (+12 pts) are most confident about market conditions next year, and VIC least so (-12 pts). QLD is the only state with positive confidence readings for all market sectors in the next 12 months. VIC was the only state with a negative confidence print in the next 2 years (-4 pts) and the only state to print negative in all market sectors, particularly Office (-25 pts).
• Capital growth expectations are highest for Industrial property in the next 1-2 years (0.8% & 1.4%), with prospects highest in NSW (2.3% & 3.3%) and lowest in VIC (-1.2% & -1.9%). Expectations for CBD Hotel values were scaled back and now expected to fall (-1.3% & -4.9%). The outlook for Office property values also cut further (-3.4% & -1.5%) and falling in all states next year (from -2.1% in QLD to -5.1% in VIC). QLD is the only state where values are expected to grow in the next 2 years (0.6%) with the biggest falls predicted in VIC (-3.6%). The overall outlook for Retail is basically unchanged (-2.7% & -1.5%), with values falling in all states bar WA in 2 years’ time (2.3%).
• National Office vacancy eased to 9.6% in Q2 (9.9% in Q1) but is still trending above average (8.5%). Vacancy was reportedly lower in all states in Q2 and remained highest in WA (11.9%) and VIC (11.3%) and lowest in NSW (8.2%). Retail vacancy rose to 7.0% in Q2 (6.7% in Q1) but ranged from 13.7% in SA/NT to 5.9% in QLD. The national Industrial vacancy rate remained steady at a survey low 2.8% in Q2, with very low vacancy levels reported in all states ranging from 2.3% in NSW to 4.0% in SA/NT.
• Office rental markets expected to remain under pressure in the next 12 months (and incentives elevated), with average rents expected to fall -0.1%, and moderately positive returns in 2 years’ time (0.7%). QLD is expected to out-perform all states for income growth in the next 1-2 years (3.6% in both years), with VIC the clear under-performer (-3.0% & -1.9%). Property professionals are somewhat more buoyant about Retail rents, with average rents now expected to decline a more modest (-0.4% & -0.1%), with positive returns forecast in all states bar NSW (-1.5% & -1.6%) and VIC (-1.5% & -0.6%). Structural under-supply and strong demand continue to underpin a positive outlook for rental growth in the Industrial sector (2.5% & 2.0%), and in all states led by NSW (3.2% & 2.5%).
• NAB Survey findings for Q2 reinforce the continuing slow-down seen in construction and building approvals data, with the number of property developers expecting to start new building works in the next 6 months falling to a survey low 26% in Q2 (33% in Q1). With a further 37% planning to start within 6-18 months, a record low 63% of developers now plan to start within the next 18 months – below the previous low set during the height of COVID uncertainty in mid-2020 (68%).
• Recent ABS building approvals data points to further weakness in construction activity/dwelling investment down the track, with total approvals now well below their early-2021 peak. NAB’s survey results also highlighted a lower number of developers planning to start new building works in the residential sector in Q2 to 47% (51% in Q1), and a below average 10% targeting Office and Retail space. But with ongoing shortages and strong demand still being reported for Industrial property, an above average 1 in 5 (18%) developers are looking to start new works in this sector.
• Funding conditions remain difficult. In Q2, the net number of property professionals who said it was harder to obtain debt to fund their businesses improved but remained elevated at -34% (-20% at the same time last year). The number who found it harder to get equity funding inched up to -27% (almost doubling from -14% at the same time last year). Looking ahead to the next 3-6 months, more property professionals believe debt funding conditions will be worse than now (-37%), with the net number expecting equity funding conditions to be worse also higher (-31%). This would make both debt and equity funding harder than at any time since early-2019.

For further information, please see the NAB Commercial Property Survey (Q2 2023)