The improvement largely reflected booming conditions in Industrial property markets, as conditions weakened for both Office and Retail property. With interest rates continuing to climb, funding conditions were also harder in Q4 and are expected to worsen in the next 3-6 months.

Survey highlights

• NAB’s Commercial Property Index lifted to a still weak -9 pts in Q4 (-20 pts in Q3). But sectoral trends were mixed. It rose in the booming Industrial market (+44 pts), and in CBD Hotels (+33 pts) where value growth was reported for the first time since the pandemic. It slipped in Office (-27 pts) and Retail (-37 pts).
• With economic growth expected to slow in 2023, short-term confidence is very weak (-4 pts), but better in 2 years’ time (+11 pts). Confidence is highest (and rose) in the Industrial sector (+46 pts & +47 pts), and was broadly unchanged for Office property (-15 pts & +7 pts). It dipped sharply and remains negative in Retail (-38 & 14 pts). By state, overall confidence levels are weakest in VIC by a considerable margin, and highest in WA.
• Capital growth expectations for the next 1-2 years were revised up for Industrial (1.2% & 1.7%), and CBD Hotels (1.3% & 0.9%) property. They were cut back and negative for Office (-1.9% & -0.9%) and Retail (-2.7% & -1.7%).
• Office rents are now expected to fall in the next 1-2 years (-0.8% & -0.2%), with the outlook weakest in VIC (-3.8% & -3.1%) by some margin. Retail rents are also expected to fall more steeply (-1.8% & -0.9%). The outlook for Industrial rents was revised up (3.5% & 3.9%), and is predicted to grow in all states led by NSW (4.2% & 4.3%).
• Office vacancy rate eased to 9.5% in Q4 (10.5% in Q3) and is expected to fall further in the next 1-2 years (9.1% & 8.3%) – but remain above average levels in all states bar QLD. Retail vacancy was down a little in Q4 (6.0%), but expected to rise next year (6.3%) and fall in 2 years’ time (5.8%). Industrial vacancy fell to a survey low 3.1% in Q4, with the market tightest in NSW (2.7%). Industrial vacancy is expected remain very low over the next 1-2 years (3.5% & 3.9%), led by NSW & QLD.
• The number of property developers expecting to commence new works within the next 6 months fell for the fourth straight quarter to 33% – the lowest result since Q3’19 – and is now trending well below the survey average (48%).
• The number of developers planning to commence new works in the residential sector rose to 49% in Q4, but remains well below average. But an above average number of developers are planning plan to start new works in the Office and Industrial property sectors (15%), but amid perceptions of over-supply only 6% in Retail.
• With interest rates climbing further during Q4, intentions to source capital were somewhat weaker than at the same time last year, with over 6 in 10 (61%) now signalling no intention to source capital in the next 6 months.
• Funding conditions were also harder in Q4, and expected to worsen in the next 3-6 months. With interest rates still rising, the net number of property professionals who said it was harder to obtain debt rose for the 3rd straight quarter to a 4-year high -36%. Equity funding was also more difficult, with the net number who said it was harder also rising for the 4th straight quarter to -27%. Looking 3-6 months ahead, a net -39% expect debt funding to be harder and -30% equity.
• In this survey, property professionals were also asked to estimate how much Office space do white collar workers need now compared to before COVID, and how much they will need in 12 months’ time. On average, they think they now need 72% of what they were using prior to COVID – ranging from 79% in SA/NT to 66% in QLD. Looking 12 months’ ahead, they expect requirements to climb slightly to 78% overall, led by SA/NT (81%) and QLD (79%). Requirements are expected to be broadly similar in all other states, ranging from 78% in NSW/ACT to 76% in VIC.

For further information, please see the NAB Commercial Property Survey (Q4 2022)