As 2022 drew to a close, commercial property markets across the country had to contend with the increased cost of borrowing which slowed down buyer momentum.
As a result, there was a shift in buyer sentiment directly correlating to a reduction in properties brought to market, with many campaigns being withdrawn.
Herron Todd White’s Industrial December Month in Review report found both the Melbourne and Sydney office markets demonstrated some resilience with sales volumes up on the previous pandemic-affected year, however the overall national volume of sales was reportedly 43% down on the yearly average over the past decade.
Herron Todd White uses an industrial property clock to display market conditions. The peak of the market sits at 12 o’clock, a declining market sits at three o’clock, bottom of market at six o’clock and rising market at nine o’clock.
The results from the HTW December report show Sunshine Coast, South-East NSW and Dubbo at the peak of the market (12 o’clock), while Sydney, Brisbane, Newcastle, Geelong and south-west Western Australia sitting at three o’clock (declining) market. Meanwhile, areas including Cairns, Townsville, Gold Coast, Central Coast, Illawarra, Adelaide, Melbourne and Perth are sitting at 9 o’clock (rising). Areas sitting at the bottom of the market include Alice Springs, Darwin, Hobart and Launceston.
Herron Todd White director Jason Stevens (pictured above) said the industrial market slowdown was due to several factors.
“These included global macroeconomic pressures however the substantial cost of capital is having the biggest effect,” Stevens said.
“The office markets are undergoing a transitionary period during the current rising interest rate cycle whereby vendors are still coming to terms with a repricing phase because of softening yields. Whilst there is still capital for funding, there is an ongoing mismatch between buyer and vendor expectations and as a result, transactions are stalling.”
Stevens said most economists were forecasting further interest rate rises and as a result Herron Todd White expected to see continued softening in investment yields with secondary located buildings with low occupancy being more susceptible than others.
“Moreover, 2022 was a tough year for CBD office leasing nationally with vacancy rates being at (or near to) record levels,” he said.
“With flight to quality and flight to experience currently in full effect, tenants are seeking to trade up for minimal increased cost. Incentives within most major CBD markets are at record levels, reported at up to 45% in some sectors, however this has been offset by slight increases in net face rents.”
Stevens said with the amount of supply starting to reduce in 2023 and 2024, he expected to see a decrease in CBD vacancy rates throughout 2023 and into 2024.
“On the positive side, the unemployment rate fell to 3.2% as at June 2022 and there are signs that inflation may have peaked based on September ABS CPI figures,” he said.
“This should lead to an uptake in tenant demand with many businesses cashing in on what is a great opportunity within the market given current incentives for prime grade CBD stock. Coupled with the continued growth of employees returning to the CBD, there may yet be more upside in 2023.”
The results of the Herron Todd White Industrial December Year in Review report told a slightly different story to the October Year in Review Report, which found industrial property was still on the rise as activity picked up pace along the east coast and many capital cities, despite seven consecutive official cash rate rises.
Herron Todd White commercial director David Walsh said its industrial specialists on the eastern seaboard all told a similar story about the industrial investment market.
“We are seeing yields for prime assets soften in the order of 50 to 100 basis points from their highs, with funds and property syndicates retreating somewhat as they struggle to structure and balance their target returns for their clients,” Walsh said.
“The mum-and-dad investors watch on closely as their cost of bank funding increases and close the gap between an investment return (and cash surplus) and debt costs.”
Are you looking to enter the industrial property market this year? Tell us about it in the comments below.
