NAB Quarterly Australian Commercial Property Survey, Q1 2024

Commercial real estate market sentiment is improving as differences in office conditions across states widen

Commercial real estate market sentiment rebounded in Q1 2024 and has now returned to positive territory and remains above average. Confidence about the next 1-2 years has also increased, with most sectors reporting improvement. While conditions have improved across the board, the greatest improvement has been in CBD hotels and CBD shops. The industrial sector grew and remained robust, supported by very low vacancy rates and strong rent growth. Office market sentiment also improved but remained weak as disparities between states continued to widen. Office market conditions were the best in Qld, followed by WA, with developers in Qld seeing sustainable office supply conditions for the first time in 5 years. However, sentiment at Vic continued to deteriorate and underperform.

Highlights from the survey

• NAB Commercial Real Estate Index returned to above-average levels in Q1, increasing by 13 points to +7 index points, with improving conditions across all sectors. The greatest improvement in sentiment was recorded in CBD hotels (+38 points to +75 index points) and retail (+16 points to -7), with smaller increases in office properties (+9 points to -22) and industrial properties (+1 point to +51) . Office markets remain by far the weakest, with all other sectors now above long-term averages.
• Commercial real estate trust also improved, with the 12-month measure increasing by +12 points to +15 index points and the 2-year measure increasing by +11 points to +27. Confidence in the short and long term has increased in most sectors.
• By state sentiment and confidence increased in all states except SA/NT as local office markets deteriorated. The largest increase in the index was recorded in WA (+29 points to +2 index points) due to a significant improvement in sentiment in the office sector (+41 points). Sentiment was highest in Qld (+24 index points) and lowest in Vic (-16), with NSW also negative (-2).
• Capital growth expectations for the next 12 months and 2 years remained strong in industrial real estate markets (2.6% and 3.5%), with the most promising prospects in the quarter (4.3% and 4.8%). CBD hotels were also expected to see positive capital growth (2.3% and 1.8%), while retail properties were forecast to experience negative growth over the next 12 months (-0.7% and 0.5%). Office capital expectations remained the weakest (-2.3% and -1.1%), with Vic weighing on the overall result (-5.3% and -2.7%).
• Vacancies in the office remained stable at 10.5% in the first quarter, remaining well above average (8.6%), as disparities between countries continued to widen. Vacancies decreased in Qld (9.5%) and WA (11.5%), but continued to increase in all other states, with the highest vacancy rate in Vic (13.0%). Office vacancy rates are expected to decline slightly to 10.1% next year and 9.1% in two years. The retail vacancy rate increased from 6.8% to 7.0%, with above-average vacancy rates expected over the next 1-2 years. The number of job vacancies in industry decreased slightly, remaining well below the average of 3.2%, with the number of job vacancies forecast to increase over the next 2 years.
• Gross rents continued to decline in the office (-3.2%) and retail (-1.3%) markets, but rents in both markets are expected to stabilize and start to increase in 2 years. Rents in industrial markets continue to accelerate (from 2.9% to 3.2%), and are expected to be slightly higher in the next 1-2 years (3.4% and 3.7%).
• Most programmers still plan to start work in the next 1-6 months, although this is a lower than average number, but more than usual are expected to start in the next 6-12 months. Nearly 1 in 5 developers (18%) plan to start new construction work in the industrial sector, however, in the face of persistent industry challenges, a below-average percentage of developers plan to start new work in the office (12%) and retail (9%) sectors. The bulk of new development is expected to be supported by land resources, with fewer developers than usual pursuing new acquisitions and renovations.
• Financing terms has become less challenging and we expect improvement over the next 3-6 months – although debt financing remains limited. Initial commitment requirements have been relaxed for both residential and commercial properties, and developers are more optimistic about the next 3-6 months.

For more information, see NAB’s Commercial Real Estate Survey (Q1 2024)