The NAB Commercial Property Index stumbled deeper into negative territory in Q3 as weakening sentiment in volatile Office and Retail property markets offset an improvement in the Industrial sector. Confidence also slipped, particularly in VIC where property professionals see capital values and rents falling quite sharply over the next 1-2 years (particularly in Office markets). Funding conditions remained challenging in Q3 but are expected to improve in the next 3-6 months.

Survey highlights

• Challenging conditions (particularly in Office and Retail property markets) have weighed further on commercial property market sentiment in Q3, with the NAB Commercial Property Index slipping deeper negative to -16 pts (-7 pts in Q2) to sit well below the long-term survey average (-2 pts).
• By sector, the Office market index fell to a near 3-year low (-38 pts) amid rising vacancy and weak capital growth. After bouncing in Q2, the Retail index also slipped back (-25 pts) as retail trading conditions remained soft and consumption growth slowed. The bouncy CBD Hotels index fell but printed positive (+10 pts). The Industrial index rebounded (+30 pts) after having fallen in the previous 2 quarters as solid fundamentals supported growth in capital values and rents.
• Recent data points to continued resilience in the economy, but the ongoing pass through of higher rates and inflation still suggest consumption growth will be soft in H2 2023. NAB expects to see below trend growth of 1-1.5% in 2023 and 2024. We also see one more rate hike in November before staying on hold until H2 2024 as inflation continues to moderate. Against this backdrop, commercial property market confidence softened in Q3. The 12-month measure fell to -9 pts (lowest since Q4’20), with the 2-year measure also down (+9 pts). Short-term confidence fell sharply for Office (-34 pts) and Retail (-24 pts) property, but lifted for CBD Hotels (+40 pts) and Industrial (+39 pts) property. The longer-term confidence measure is positive for CBD Hotels (+50 pts), Industrial (+38 pts) and Retail (+2 pts) property, but turned negative for Office property (-10 pts).
• Overall commercial property market sentiment in Q3 was negative in all states except QLD (+6 pts). It was lowest by a considerable margin (and fell further) in VIC (-38 pts), driven by very weak sentiment for Office (-79 pts) and Retail (-56 pts) property. Short-term confidence was highest in WA (+11 pts), which was also the only state reporting a positive result (and in all sectors). It remained much lower in VIC (-31 pts), particularly for Office (-75 pts) and Retail (-59 pts) property. Longer-term confidence levels printed positive in all states apart from VIC where it fell sharply (-18 pts).
• Capital growth expectations over the next 1-2 years were highest (and revised up) in the Industrial (1.0% & 1.5%) and CBD Hotels (1.0% & 1.5%) sectors. Expectations for Industrial property were positive in all states led by SA/NT and NSW and lowest in QLD and VIC. Capital expectations for Office property remain very weak (-3.7% & -1.3%), particularly in VIC (-6.6% & -3.1%) and NSW (-5.4% & -2.9%). WA is the only state where property professionals see values growing in the next 1-2 years. The outlook in the Retail property sector is also subdued (-2.5% & -0.8%), with values tipped to fall most heavily in VIC (-3.9% & -2.4%).
• The national Office vacancy rate rose to 10.2% in Q3 (9.6% in Q2) and increased in most states. It was highest in WA (12.5%) and VIC (11.8%) and lowest in NSW (9.2%). Office vacancy is expected to dip slightly to 10.0% next year and 9.2% in 2 years’ time, and remain highest in VIC (11.7% & 10.5%). Retail vacancy eased to 6.8% in Q3 (ranging from 9.4% in SA/NT to 3.5% in WA), but property professionals see above average vacancy persisting over the next 1-2 years in all states except WA. The national Industrial vacancy rate increased to a still well below average 3.4% in Q3 from a survey low 2.8% in Q2, and was higher in all states bar NSW (2.2%). The average survey forecast is for Industrial vacancy to creep up to 3.9% & 4.5% in the next 1-2 years), but remain below average in all states.
• Office rents are expected to be under more pressure in the next 1-2 years, with average rents to fall -1.1% & -0.5%. Rents are expected to fall in most states in the next 12 months, led by VIC (-4.6%). QLD (2.6%) and WA (2.1%) are expected to out-perform in 2 years’ time, with VIC (-3.4%) and NSW (-1.9%) clear under-performers. The outlook for Retail rents in the next 1-2 years was also scaled back (-0.7% & 0%), with rents growing in all states except VIC (-3.2% & -2.4%) and NSW (-0.5% & -0.2%). Property professional see Industrial rents growing faster (2.6% & 2.5%), with prospects best in NSW (3.9% & 3.6%) and VIC (3.0% & 3.1%), and lowest in QLD (1.6% & 1.4%).
• The number of property developers expecting to start new works in the next 6 months rose to 39% in Q3 after falling to a survey low 26% in Q2 (though still trending well below average),  and a largely unchanged 38% plan to start in the next 6-18 months. In total, a below average 77% plan to start new works within 18 months, suggesting construction activity may be relatively subdued in the period ahead.
• The Q3 survey pointed to a further decline in the number of property developers planning to start new works in the residential sector to a below average 45% in Q3. Amid ongoing sectoral challenges, a below average number also planned to commence new works in the Office (9%) and Retail (8%) sectors. But with historically low vacancy, strong rental growth and ongoing imbalance between supply and demand for industrial space expected to persist in the near-term, a survey high 23% plan to start new works in this sector – around twice the survey average level (12%).
• Funding conditions remained challenging in Q3 but are expected to improve in the next 3-6 months. The net number who said it was harder to obtain borrowing or loans (debt) increased to -36% in Q3, while the number who said equity funding was harder was largely unchanged (-26%). Looking ahead, fewer property professionals on balance expect funding conditions to be worse in the next 3-6 months, with net number expecting debt funding to be worse falling to -27% and equity funding to -19%. Property professionals’ perceptions of the average precommitment percentage of projects required to meet external debt funding requirements for new residential developments increased to 62.7% in Q3 (60.4% in Q2) but inched down for commercial property (56.4%) in Q3.

For further information, please see the NAB Commercial Property Survey (Q3 2023)