Investing in commercial real estate:

2023 in review and an outlook for 2024

Following a year of adapting and fine-tuning its approach after the pandemic, the commercial real estate sector in Australia is headed for a positive turn, with a promising outlook for 2024 and beyond.

Inflation has been a tough challenge for Australians over the last year and it’s come on top of an uncertain few years leading up to 2023. This has led to some instability for the commercial property market, and many interested investors are wondering what the future will hold.

Overall, higher interest rates have led to a softening of commercial property values and while that’s been challenging for current owners, the ability to secure properties at competitive prices means that 2024 is shaping up as a potentially favourable time to invest in commercial real estate.

In good news for local investors, Perth and WA markets are remaining especially resilient, and showing great prospects for future growth.

2023 in review

The commercial property market has experienced some dramatic swings in recent years. When the pandemic first hit, sales volumes understandably plunged due to all the uncertainty. 2021 ended up being a rebound year, with record-low interest rates driving the highest deal values on record.

Things looked very different in the first two quarters of 2023 as a series of rapid interest rate rises caused sales to collapse to decade lows. Recently, however, there have been signs of recovery, with inquiry levels picking up as renewed confidence takes hold.

Much like the residential property sector, where states, cities and suburbs experience their unique ups and downs, each segment of the commercial real estate market has performed differently in recent months. And as optimism grows, some sectors have fared better than others, with the following patterns emerging:

• Childcare assets continue to see strong investor demand with inquiries having risen year on year.
• The industrial sector has also outperformed, benefiting from vacancies hitting all-time lows during the pandemic, pushing rents to record highs.
• The medical sector is experiencing strong growth driven by government investment and demand from an ageing population.
• The hotel industry is steadily recovering as tourism activity rebounds.

On the flip side, office and retail have had challenges:

• Office vacancies have crept higher, especially in Sydney and Melbourne, creating opportunities for tenants to upgrade or move to higher quality office spaces.
• Retail remains divided. Many investors have focused on non-discretionary retail, which is perceived as being more recession-proof, while discretionary retail has experienced a greater degree of stress.

The big-picture outlook for 2024

Experts predict the next two years will continue to deliver growth and opportunity, with declining interest rates and falling inflation expected to create favourable conditions in late 2024.

Promisingly, the history of rate hike cycles shows that a bottoming out period has been followed by rising property values in the subsequent recovery. For example, after each of the three rate hike cycles ending in 1994, 2000, and 2010, investors experienced above-average returns over the following five years.

If history is any indication, by investing in quality commercial assets after the expected dip, investors will have a chance of increasing their returns over the next three to five years as the market recovers.

Fortunately, the Australian economy provides a solid foundation for future growth. We have a triple-A credit rating and have enjoyed a period of almost 30 years stability since experiencing a significant recession. As well, our economy is well-diversified with relatively low exposure to external threats and forces.

Even with those strong drivers in place, population growth will be the major contributor to the country’s long-term success. It’s expected to grow by half a million in the next 12 months, followed by 10 percent over the following five years. This will create an estimated $20 billion in demand, sparking a boom in goods, services, and the infrastructure to support them.

Obviously, outlooks differ by sector. Here are some patterns we see playing out in the “big three” areas of the commercial property market – industrial, office and retail – over the next 12 months:

1. Industrial sector on a roll

Industrial investors are expected to reap the rewards of scarce supply and robust rental growth. With e-commerce’s continued popularity and need for distribution networks, the industrial success story is likely to continue, bucking conventional market cycles and becoming a lasting structural trend.

This is especially the case locally. Warehouses are a critical part of the economy in WA, with businesses relying on them for their entire suite of operations from production and storage to logistics and distribution.

Not only is the value of industrial assets on the rise, yields are now around 6 percent and rents have grown almost 23 percent in the last 12 months.

Limited release of industrial land by local governments is adding to the tight supply and slowing the rate of development, further adding to the supply challenges and positioning well-located existing properties for strong rental growth in the medium term.

3. Non-discretionary and experienced-based retail defy inflationary pressures

Australian Bureau of Statistics data paints an optimistic picture for the nation’s retail market, despite inflationary pressure. June to July 2023 showed a 0.5 percent month-to-month increase in retail spending and a 2.1 percent rise in spending compared to July 2022.

In 2024, large-scale and big-box retailers are likely to have the best prospects of rental growth, closely followed by neighbourhood shopping centres. Local centres provide essential goods and services, and benefit from consistent demand irrespective of economic cycles, giving them a level of stability even when broader discretionary spending is affected.

Trends in retail design are also having an impact on its desirabilitiy as an asset class, with experience-based shopping being something the sector is increasingly factoring into its strategy.

Features like playgrounds, community spaces, coworking spaces, and better connectivity, are making it more attractive to spend time at various sites. This is having a positive impact on the number of visitors and the length of their stay, as well as producing a higher return on investment.

Make your investment strategy for 2024 a priority

Despite economic pressures and the ongoing effects of the pandemic in 2023, commercial property continues to provide a thriving market for investment with new opportunities ahead.

As a diversified commercial property investor, AGEM Property Group has an impressive track record of partnering with clients to grow their wealth. With our local knowledge of Perth and WA, we’re able to offer excellent investment opportunities in areas such as neighbourhood retail, industrial and multi-purpose warehouses, and quality, well-located office space.

We coinvest in property funds and syndicates in partnership with you, and actively manage the investment process to ensure you achieve maximum return with minimum risk.

For more information about quality commercial property investment opportunities in 2024, contact us today.

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