Property Industry Weighs in on 2023 Commercial Sector

While the commercial sector is a broad church there were some overarching themes that permeated many of the asset classes this year. We spoke with industry players at the coalface and asked them where they saw the opportunities and challenges in 2023.

Chrystan Paul
Chief executive
Alt Living 

“Going into 2023, I expect to see an escalation of the same tailwinds that helped to propel build-to-rent in 2022—namely the slowdown of construction for new build-to-sell dwellings and an increase in net overseas migration, both of which will add significant pressure to an already supply constrained rental market across all capital cities.

“As completed build-to-rent assets achieve peak occupancy in 2023, I believe the benefits of the build-to-rent model will gain wider recognition from a resident’s perspective. As renters move into brand-new assets, they will start sharing their experiences via social media, word of mouth and consumer-focused media.

“Completed build-to-rent assets will benefit from upward inflationary pressure on rents, while development projects will have to grapple with rising interest rates and construction costs, resulting in project underwrites being rewritten across the board.

“However, I do not foresee a slowdown in build-to-rent acquisition activity and expect build-to-rent developers to fill the void in certain markets, where traditional build-to-sell developers may be struggling and having to exit sites.”

Sameer Chopra
Pacific Head of Research

“Vacancy tightened across all asset classes though 2022, which in turn helped power higher rent growth. In office, we upgraded rents by 4-8 per cent and industrial by up to 35 per cent through the course of 2022.

“Looking ahead, I am concerned about whether mooted new supply will manifest.  Financing challenges and rising requirements for pre-commitments, which in many cases are 40-60 per cent, are likely to push out projects by 12 to 24 months. So, vacancy should tighten even further and rents could again provide an upside surprise.

“The other big theme we see is a bifurcated market with strong demand for premium and value, across office, residential and retail. It’s the middle ground where assets continue to have higher vacancy.  Re-positioning assets will remain a feature.

“Our consumer and worker surveys highlight a preference for minimising commute time. This will drive demand for residents returning to city centres and centralised offices with easy access to public transport.”

Jason Huljich
Joint Chief Executive
Centuria Capital Group

“Throughout 2023, we expect there to be a stronger focus on alternative commercial property opportunities including healthcare, agriculture and real estate credit—the latter providing non-bank real estate finance to the industry, as the traditional four banks tighten their lending criteria.

“Additionally, we expect more office assets will be brought to the market, especially from those who need more equity for their development pipelines.

“We believe there will be more positive sentiment across the domestic market once we reach peak inflation and interest rates stabilise and, this in turn, will generate more investor interest in listed REITs and unlisted property investment opportunities.

“Finally, we foresee strong industrial rental growth to continue throughout the coming year due to strong demand fundamentals and limited supply.”

Andrew Ballantyne
Head of research

“The Australian commercial real estate market is going through a process of price adjustment as investors assess the impact of higher interest rates and the implications for return hurdles.

“We believe that high quality assets will be more resilient, and we will start to see a widening of the prime/secondary yield spread across most sectors and geographies.

“ESG considerations will continue to increase in importance and real estate investors will explore new and innovative capital expenditure strategies to reduce the carbon footprint of their portfolio.”

Sass J-Baleh
Head of industrial and logistics research

“During the past six months we have recorded significant rental growth and overall decline in incentives for the Australian Industrial and Logistics market.

“The current year-on-year growth rate for super prime grade face rents (national supply-weighted average) stands at a record 25.3 per cent (as at the fourth quarter, 2022).

“We forecast national rent growth to average circa 5 per cent CAGR over the next four years. Australia continues to record the lowest national vacancy rate globally (0.6 per cent), and Sydney has lowest vacancy rate of any city globally (0.2 per cent).

“While vacancy rates in other countries remain low, we have begun to see a slight uptick in some offshore markets, mainly owing to a significant slowdown in the e-commerce penetration rate.

“We expect to see more of this globally over the next six to 12 months amid the challenges of the global economic market, however the supply-demand dynamics in Australia are unique.

“The Australian market is shaped by pent-up demand, with an immature-but-growing e-commerce sector and a chronic undersupply of industrial space, which will keep vacancy rates at extremely low levels.”

Charles Mellick
Fortis Group

“The next 12 months will be an interesting time for property development throughout Australia, primarily driven by the increased funding pressure the industry is already experiencing as banks and non-banks tighten their lending criteria alongside the rising costs of capital. This will undoubtedly create challenges for groups without secure funding and the necessary equity to commence projects.

“As a result, it’s likely to create some activity and opportunities for developers with strong balance sheets to pick up fundamentally sound properties and continue to grow their pipeline.

“We trust that exceptional quality in blue-chip locations where supply is typically low will continue to see strong demand despite market cycles.

“ This has been our experience for our residential and commercial office product and we expect this to continue into 2023.”

Chakyl Camal
Chief executive
Panthera Group

“The predictions I made for 2022 which have come to fruition, will still be relevant for the year ahead. User behaviours will continue to follow a path of change and uncertainty, and businesses will prioritise flexibility on their property commitments.

“In 2023 we are going to see a challenging financial environment, with high interest rates, and a difficulty to deliver projects due to inflated construction costs and the cost of financing.

“High airline costs will maintain strong domestic tourism performance in Australia, with continued strong retail performance—a recent report shows that consumer discretionary spending has surpassed pre-pandemic levels.

“ The repositioning of commercial assets will be an important opportunity to suit a lifestyle work environment in CBD locations.”

David Stone
Chief executive
Central Real Capital

“I’d argue that a mix of nervousness from the banks, slower and more
conservative larger non-banks, and less capital in the private lending markets than 12 to 18 months ago means that the risk versus return relationship is arguably in a closer state of equilibrium and common sense now than before.

“With less capital in the market the flow on effect is that transactions are now being adequately priced for risk, as opposed to lenders cutting margins or increasing leverage, purely to deploy capital.

“A genuine risk I’m watching out for in 2023 is the quality of valuers. In a declining market, we want to work with valuers that position themselves on the conservative side. We will challenge valuers’ assumptions and conduct a level of heightened due diligence, as refinance risk is considerably
heightened. This is good business practice that many have let fall by the wayside in response to an incredibly robust property and private lending environment prior to interest rate rises.”

Karen Wales
Head of Hotels

“Investors continue to be drawn to the sector, as Australians have shown an appetite and willingness to spend up on travel and tourism. While travel bounced back strongly in 2022, driven by pent-up demand and the lifting of
restrictions, Australia’s large domestic tourism base has underpinned recovery of the sector, which is projected to reach pre-pandemic levels in 2023.

“Investors are also attracted to hotels as an inflation hedge, which have the ability to pass on rising costs immediately with dynamic pricing models and a greater reliance on technology which is resulting in a nimbleness that Australian hotels—and indeed their owners—have long pursued.

“We expect a rebound in offshore capital investment in the Australian hotel market next year, which will occupy a favourable position amidst greater volatility overseas.”

Stephen Nicol
Head of office leasing
GPT Group

“There is no one-size-fits-all model for workplaces, and we expect to see our customers’ needs continue to evolve as they make decisions on their space requirements in 2023.

“Strong customer engagement will continue to be crucial to the success of landlords, which provides rich insights into the space, services and experiences our customers desire, and positions us to exceed their evolving expectations.

“At GPT, we know workplaces need to foster collaboration and creativity, promote productivity and culture, and facilitate employee wellbeing and engagement, and we are curating a range of quality workplace solutions designed to provide variety and scale for a broad range of customers.

“This includes catering to a market of smaller, growing businesses that are currently underrepresented in the best quality office buildings in prime locations, who require the space and flexibility to grow over time.

“Across the board, having strong sustainability credentials continues to be a common demand from all customer types.

“Customers have high expectations around the incorporation of superior materials, better technology, acoustic treatments, employee wellness facilities and longer lasting fit-outs, and GPT’s approach in delivering long term value and positive outcomes for both our customers and the environment will continue to serve us well in this space.”

Trudy Crooks
Managing Director

“We’re anticipating a promising 2023 for the accommodation sector despite challenges for the rest of the economy. Tourism Research Australia forecasts the number of visitor nights will increase by 20 per cent in 2022-23 which will get us back to pre-Covid levels. This means we’ll continue to ride the domestic tourism boom we’ve been enjoying as we’ve emerged from lockdowns.

“Those tourist dollars aren’t likely to go overseas either. Against the greenback, the Australian dollar is tracking around 10 cents lower than recent historical averages. This makes overseas travel more expensive for Australians and therefore a less attractive holiday option. All this is terrific news for our domestic accommodation sector.

“There will surely be some belt tightening as we see household costs increase, but Australians will always go on holiday with their budgets dictating how far afield they go. This is particularly good news for caravan parks which are seen as an affordable getaway for families.

“In the management rights business, high inflation creates great opportunity for sellers. For most management rights businesses, salaries increase in line with CPI. Strong salary growth is always attractive to buyers.

“To add to this, activity will be generated by the fact that Australia continues to represent good value for money for overseas investors.”

Jack Steinhart
Director of development
Vicland Property Group

“For office, I believe the flight to quality will take another step forward in 2023 and beyond. Tenants and purchasers alike are looking to invest in the most sustainable and technologically advanced buildings with premium amenities.

“While I don’t expect a return to pre-pandemic take-up of office space, I do believe size requirements will stabilise as businesses adapt to new ways of using space, for collaboration and connection, to encourage staff back into the office.

“Rising interest rates will likely slow local investment but internationally, confidence will remain high due to the increased demand for quality assets.”

Vivek Subramanian
Managing director and chief executive

“It’s no secret that 2022 presented many new challenges—our team is very much focused on delivering key assets and progressing construction works across the pipeline, and we will keep our finger on the pulse across acquisitions to see how they respond to the market conditions.

“We are expecting the appetite for high-quality retail and logistics to remain strong, particularly as new homes in growth areas purchased during Covid reach completion, and more residents move into the emerging regions that we play in.”

Oscar Ledlin
Ledlin Group

“With interest rates poised to continue rising in 2023 some uncertainty has crept into the previously bulletproof industrial market.

“Ledlin expect to see a continued segregation of A and B-grade properties, with occupants having a number of options to choose from as demand eases for the first time in some years.

“Buyers will favour projects lead by credentialed development teams, looking for assurance that their investment is in safe hands, as failed sales campaigns join contract administration risk as a topic of conversation in the property development space.

“Finally, consumers will seek out properties that form part of collaborate work environments, gravitating toward collectives of likeminded businesses and individuals—as leaders continue to usher their teams back to some form of a centralised location.”

Paul Savitz
Director of operational capital markets

“While there’s been substantial consolidation in the student accommodation market pre-pandemic, we have yet to see liquidity enter the market for single asset sales or portfolio trades in 2022, primarily due to macro uncertainties.

“Land acquisition for development remains competitive as developers of multi-family, hotel or residential for sale pursue the same opportunities and building cost inflation, particularly material and energy prices, as well as labour shortages continues to add upward pressure.

“Bed supply pipeline delivery for the coming years looks set to be muted with a further 4,979 becoming operational in 2023, but a drop down to
only 1892 forecasted to be delivered to market in 2024.”

Jason Uzice
Chief Property officer

“Macroeconomic factors, uncertainty, and the impact on buyer sentiment will continue to play a key role in 2023 and there is no denying prices and demand will soften—but there is always demand for good properties and good properties with good attributes will always have appeal and will transact.

“Baby boomers are retiring later and are willing to reward themselves as they approach their twilight years. Quality accommodation, lifestyle and care services are a strong value proposition for this market.

“A strong property market will also afford downsizers and retirees more choice and the opportunity to invest in their lifestyles and premium accommodation.

“An ageing demographic and strong property market will underpin demand for Retirement Accommodation over the next 10+ years and remains a growth focus for VMCH.”

Rick Romano
Head of global real estate securities
PGIM Real Estate

“REIT fundamentals remain resilient amid elevated macro concerns at a time when REITs should stand out due to their inflation-hedging characteristics and limited supply chain exposure.

“Limited exposure to inflation is an attractive attribute. Properties with triple-net leases, where most of the burden of higher costs is borne by tenants rather than landlords, fall into that category.

“Self-storage facilities are also appealing because they require little in terms of labor, largely insulating them from wage inflation.

“Many of the risks that rattled investors in 2022 remain unresolved entering 2023, and the economic implications of the fight against inflation are still unknown.

“Interest rates make refinancing a costly proposition, as companies forced to refinance at today’s higher rates will pay the price in the form of lower earnings.”

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