In 2016 alone, more than $25 billion worth of commercial property changed hands, notes LJ Hooker head of research, Matthew Tiller. And while SMEs are far from the biggest spenders in dollar terms, they make up a large portion of the volume of transactions taking place.
This year is expected to be no different. While there are many factors that affect the pricing and level of competition for commercial property at a local level, more broadly there are two key factors shaping the market in 2017: continued low interest rates, and the completion of a huge volume of new residential projects, particularly on our east coast.
“The underlying environment of low interest rates is making underlying affordability attractive, and the ability to get commercial finance is the best it’s ever been.”
It would come as a surprise to no one to hear that, overall, the commercial property markets of the major east coast cities have been the nation’s top performers in recent times.
“Certainly the east coast is performing well,” notes Jonathan Street, CEO of Thinktank Commercial Property Finance, “but as we go west, it’s getting more strained.”
While this growth in values does mirror that of residential properties – especially in Sydney and Melbourne – Jonathan says that any correlation between the prices and demand of commercial and residential property is a loose one.
“Under $5 million does have an association, with business owners and investors comfortable with the amount of equity in their residential property holdings and their own home to borrow. But largely there is more influence from employment and the economy,” he says.
“I think the underlying environment of low interest rates is making underlying affordability attractive, and the ability to get commercial finance is the best it’s ever been.”
This attractive buying environment has led Commercial Property Guide to establish an asking price index on the commercial property rental market, tracking monthly changes in rents across our major cities.
“Overall growth for 2016 in the three major cities was 10 per cent in Sydney, 5 per cent in Melbourne and Brisbane saw a 2 per cent increase,” explains Commercial Property Guide CEO, Simon Rose.
One of the biggest surprises of 2016, says Matthew Tiller, was Tasmania.
“Tasmania surprised on upside in residential and commercial – both in terms of population and business growth,” he says.
“That’s on the back of a few things – housing affordability is a lot more lenient, so it’s not an issue – so more people are moving down there. Investors are looking there as an option, and that’s had a knock-on effect in commercial markets. Also the fall in the Aussie dollar has seen tourist [numbers] pick up, and investment from Chinese tourists going down there.”
Other centres have been somewhat more stable in price growth, while both sales values and rents in Perth have continued to see downward pressure.
Offices in most metropolitan areas are likely to become more expensive in the year ahead, according to Ken Morrison, chief executive of the Property Council of Australia.
“Australia’s divergent office markets are about to be hit with a super-cycle of low supply,” he says.
“Australian CBD markets are due to have only 462,000 square metres of space come online over the next three years. This is just half the amount of new supply CBD markets have experienced over the last 18 months.
“With supply such a minor part of the picture in coming years, demand will drive vacancy rates down across our CBDs.
“For cities like Sydney and Melbourne, it is likely to mean pressures on rents, and in cities like Darwin and Perth which have extraordinarily high vacancy rates, it will mean a welcome reprieve for property owners.”
Matthew Tiller says this pressure will be felt more acutely in some areas than others.
“Really small office suites are very few and far between in the Sydney CBD.”
That, he says, is causing many businesses that don’t need to be located in central Sydney to look for space further afield.
“There has been a decline in vacancies in Wollongong and Newcastle in last six months … which demonstrates that businesses are starting to take a look outside of Sydney.
“Tight vacancies will accelerate rental increases in Sydney CBD, reducing affordability for tenancies, so we will see an increase in businesses looking further afield. The Central Coast is also a growing office market – the new Mariners office building leased really well when it came onto the market last year.”
The opposite has been true in Perth in recent years since the end of the mining boom, with values continuing to struggle. However, businesses looking to relocate in 2017 may want to do so sooner rather than later, as Matthew believes the downward cycle is nearing an end.
“Vacancy rates for Perth CBD are at 22 per cent according to the Property Council, compared to 5 or 6 per cent in Sydney. During mining boom, vacancy rate was at or close to zero,” he explains.
“But in saying that, there are some opportunities over there – commodity prices have begun to pick up and rebound – as more projects become more feasible, there could be some more business growth over there. High vacancy means opportunities for existing tenants to upgrade: a flight to quality.
“There has been some movement from suburban fringes into the Perth CBD to take advantage of quality at cheap levels – rents are good and people are negotiating down to very flexible rates. Businesses aren’t expanding, they are just looking at quality of space.”
Matthew suggests that the high vacancy rates are, in large part, due to new office towers being built during the mining boom when demand was at its peak but only now reaching completion, meaning large volumes of new space have entered the market at a time of suppressed demand.
However, they have largely been completed now, and as businesses continue to move into the CBD from suburban areas, vacancy rates will fall.
“No new construction will start while vacancy rates are so high, so vacancy rates will slowly drift down,” he says.
“Definitely in Perth it’s topped out I think. It may go sideways, it may go up slightly, but the major portion of vacancy has hit the market.”
Elsewhere, Matthew says prices in other cities as well as regional areas have held their own much better than in Perth.
“Adelaide in particular is more established and diversified in its business offering, and also hasn’t gone through a construction boom,” he points out.
“The vacancy rate may have drifted upwards due to business contraction, particularly the slowdown in manufacturing and the closure of car manufacturing plants. But with economic growth comes the prospect of business growth, and some areas will see increased activity – such as around Port Adelaide thanks to new government contracts.”
Simon Rose adds that across the board, there has been an explosion in demand in recent times for shared office space, as SMEs and start-ups seek to share the cost of premises while simultaneously opening up their business and their employees with like-minded professionals.
“There is a lot of shared space, so we get a lot of enquiry particularly for shared office space. Our share of that has increased dramatically in volume,” he says.
You may be forgiven for thinking that a spate of high-profile retail collapses (think Masters, Dick Smith, Pumpkin Patch and Eagle Boys Pizza), combined with the boom in e-commerce and online retailing, would leave retail property out of favour with tenants and buyers alike.
However, as Jonathan notes, there can still be considerable competition for prime retail premises – and that competition is taking place in most areas right across Australia.
Somewhat surprisingly, research conducted by Colliers International over the second half of 2016 suggests that virtually across the country, vacancy rates in regional areas are markedly lower than those in the major cities.
Jonathan Street says there is likely a key factor driving this push to secure non-central retail premises.
“Where typical retailers may be pulling out of property due to economic factors, they are often taken up by doctors and other professional services,” he says.
“So there is strong demand from them in this space, to be close to the population. Of course it varies suburb to suburb, but generally that is the case across the country.”
Matthew Tiller agrees that retail in particular will see strong demand, especially in light of the residential construction boom in the eastern states.
“I think the real growth area for small commercial premises is completion of residential dwellings across the capital cities – opportunities for businesses to set up or investors to acquire commercial leases, retail or industrial estates to service populations in these areas,” he says.
“Sydney, Melbourne and Brisbane will be strong given a mixture of the housing. The housing aspect is stronger in Melbourne; Sydney has those estates as well, but they are more higher density residential, which is ground-floor retail only really.”
Industrial property can refer to traditional factories and manufacturing centres, as well as warehousing used for storage.
Simon Rose says there isn’t as much demand from SMEs for industrial property compared with the other property types, but what demand is present is heavily concentrated on the city fringes of Melbourne and western Sydney.
“And it’s mostly for combined industrial and office space,” he says.
According to Simon, there is not as much industrial demand from SMEs, but city fringes in western Sydney and also Melbourne, are quite hotly contested, mostly combined industrial and office buildings.
However, Matthew Tiller says that demand for smaller-scale industrial premises is hotting up, particularly in and around Sydney and Melbourne, given that booming residential property prices are driving a new surge in renovations.
“[As such] tradies in the suburbs, building material suppliers etc. are taking up more industrial properties in Sydney and Melbourne.”
Industrial demand, according to Luke Dixon at Colliers International, is largely being driven at present by infrastructure development.
“NSW and Victoria will see a record $110 billion of combined infrastructure investment over the next four years, which is propelling the industrial market forward,” he wrote in Colliers International’s Industrial Second Half 2016 report.
2017 at a glance…
Expected price increases:
- Offices in the Sydney CBD, Wollongong, Central Coast and Newcastle
- Retail strips across Sydney, Melbourne and Brisbane
- Retail premises in regional and sub-regional NSW, Western Australia and South Australia, as well as near to any large-scale residential developments nationally
- Small-scale industrial, particularly in suburban Sydney and Melbourne
- Virtually all property types across Tasmania
- Industrial property and appropriately zoned vacant land in Newcastle, NSW
- Offices in Adelaide
- Darwin offices
- Suburban offices in and around Perth
- Industrial property across Western Australia
Beware of buyer’s [or renter’s] remorse
Just as happens among home buyers and tenants, it is possible for anyone in the market for commercial property to commit to something beyond their needs and their budget.
“A lot of people get wowed by shiny new offices,” says Simon Rose.
“We consider ourselves a mid-sized business, and we looked at offices that were more unappealing to most people and then dressed it up ourselves.
“[Perhaps excluding retail premises,] you don’t have to have the shiny new on the outside, just make it look good on the inside.”
Australian office vacancy rates
Compare the vacancy rates of commercial offices in your area with those of other cities and regions:
Adelaide: 16.2 per cent
Brisbane: 15.3 per cent
Canberra: 12.6 per cent
Darwin: 22.5 per cent
Hobart: 8.2 per cent
Melbourne: 6.4 per cent
Perth: 22.5 per cent
Sydney: 6.2 per cent
National: 10.9 per cent
Source: Property Council of Australia. Figures accurate as of January 2017.