Overview

• The COVID-led economic downturn continued to weigh heavily on commercial property market sentiment in Q3. NAB’s Commercial Property Index remained deeply negative at -51 points (from a survey low -62 in Q2).
• Sentiment remained weak in most sectors – led by Retail (-71), CBD Hotels (-60) and Office (-53). Industrial was the most resilient market under COVID, with sentiment far less subdued (-14) as rising e-commerce activity continued to support strong demand for warehousing and logistic requirements.
• With uncertainty surrounding the economic outlook, market confidence is very weak. The 12 month measure was -52, and the 2 year measure -29, indicating property experts are not expecting commercial markets to improve soon.
• The 12-month confidence measure is weakest for Retail (-71), followed by Office (-63) and CBD Hotels (-60). The 2 year measure was broadly unchanged at near record lows in Retail -47 and Office -40. But Industrial confidence was positive (and improved) in the next 12 months (+4) and in 2 years’ time (+26).
• Market sentiment improved in most states in Q3, but was still deeply negative – ranging from -57 in SA/NT to -28 in WA. VIC was the exception, with sentiment touching a record low -70 in testing local circumstances. Market conditions are also expected to be challenging in the next 1-2 years in all states except WA.
• The outlook for capital growth in Office improved a little in Q3 but is still very weak (-3.0%) in the next 12 months. Expectations are negative in all states, led by VIC (-4.8%). Retail expectations were unchanged at -5.0%, with heavy falls in all states bar WA (flat). Expectations for CBD Hotels also unchanged (-4.5%), and Industrial basically flat (-0.3%), ranging from -1.5% in VIC to 3.8% in SA/NT.
• The national Office vacancy rate lifted to a 2½ year high 9.0% in Q3 (8.5% in Q2), driven by an increase in QLD (11.8%). Overall vacancy is expected to climb further to around 10% in the next 1-2 years, with increases in VIC (around 8.7%), NSW (around 8%) and QLD (around 13½%).
• With many commercial tenants still struggling in a challenging economic environment, the rental outlook remains weak for Retail and Office property. The outlook for Industrial rents has however improved.
• Overall, a below average 79% of property developers plan to start new projects within the next 18 months, suggesting the disruption caused by COVID will continue to impact the construction industry in the near to medium-term.
• Property experts said their debt funding conditions worsened in Q3, with the net number who said it was harder to obtain debt rising to -31% (-27% in Q2). The net number who said it was harder to obtain equity financing however improved a little to -22% (-25% in Q2). Property experts do not see any improvement in debt and equity funding conditions over the next 3-6 months.
• New research revealed that over 1 in 3 Industrial property experts believe rent collections were unchanged or increased in Q3. Around 1 in 2 estimate enquiry levels had also not changed or increased, with enquiry driven by logistics (83%) and supply chain businesses ()67%. Around 1 in 4 industrial businesses are also preparing for future expansion in 2021 and beyond.
• Survey respondents who considered VIC the most important state to their business were asked how their business reacted to Stage 4 Lockdown. Almost 1 in 2 said there was no change. The impact was most significant for their labour force, with 1 in 3 reducing their workforce by some degree. Around 12% shut down their business for the entire lockdown period, and 5% said the long-term viability of their business was permanently impacted.
• Their main concerns from a business perspective to lockdown were about maximising sales and no open homes (17%) and funding or cashflow (15%).

For further information, please see the NAB Commercial Property Survey (Q3 2020).