Accurate commercial property measurements are worth 1000 surveys: Commercial Property Guide

GUEST OBSERVATION 

Here’s a glimpse at what’s happening—and why—in the Australian commercial real estate market from the measurement perspective of asking price for rents. There are many experts who give advice on how to understand the current trends in commercial real estate.

Whether you’re planning to buy, sell or lease, these expert opinions are worth noting.

Experts focus on “prime”

Most of the published information about commercial real estate relates to the highly visible “prime” end of the market. Sometimes this can give a distorted view of the whole market.

We, at Commercial Property Guide reveal the data associated with the less examined small and medium size market. The value of commercial real estate is closely tied to the rent a property can command. This is much more relevant for commercial than residential real estate. A study of what landlords are asking for commercial rents over time can give an insight into the likely future.

National Market Overview

The Australian market is made up of a relatively small number of significant markets. The three major markets are MELBOURNE, Sydney and Brisbane which account for the lion’s share of the national commercial real estate industry. These metropolitan markets respond and react to many local events.

There are, however, national and international themes that can be seen to have a bigger influence on how they perform. Rarely do the three big metropolitan markets act in unison. Commercial real estate has been experiencing a cycle that has lasted 3 years between lows.

The national asking rent increases peaked in early 2017 at very high levels and have been trending down ever since. Exceptionally glum periods were at the end of 2018 and the time prior to the national election when rent increases dropped below zero. Sydney has had a number of peaks and troughs in the past few years.

These cycles have been about 10 to 14 months from peak to peak. While Sydney commercial real estate rent increases sailed through previous national elections unfazed, this time was different. Sydney office rents have risen since the election.

MELBOURNE and Brisbane are not synchronised with Sydney. MELBOURNE rent increases were in a slow and graceful decline. However there has been an upswing in lease prices since the middle of 2018. While Brisbane rents have managed only increases of 1% every three months at best.

Office asking rent increases have been in what stockbrokers would call a “trading range” for many years starting in January 2017 with a slow declining cycle peak in each of the three successive cycles.

The explanation could be the rapid surge in coworking office space flooding the lower end of the small office market. You don’t need to be a behavioural economist to know office landlords are hoping for an end to decreasing rents.

At the more granular level there is variation in asking prices for office rents between major cities and even suburbs within the same city. For example, different office rent increases do exist between adjacent Prahran and Cremorne in MELBOURNE. Retail rents are a much more interesting picture.

The Retail market was going down for quite some time, but since July 2018, retail rents have been continuing to increase. By comparison, the industrial property market has been travelling well and has enjoyed reasonably stable rent growth over the last 5 years.

However, there was a mysterious bout of Christmas fear that started in October and didn’t show signs of improvement until this January. There was a fresh round of Amazon Armageddon about warehouse demand stories that spooked the industrial landlords and their real estate agents.

The fear seems to have evaporated as quickly as it arrived.

Property Value based on Rent Return

Commercial real estate properties are valued on the basis of the revenue they can generate. The change in rent not only affects what the tenant pays, but also the value of the landlord’s asset.

The consensus of industry experts is that a “tight market” is driving future rent growth for MELBOURNE and Sydney - caused in part by leasing decisions being brought forward to beat other property seekers to the best available leases. More experts have identified the affordability of the Brisbane market driving its leasing demand.

These opinions are worth considering.

SIMON ROSE is the CEO of Commercial Property Guide an independent commercial property website that focuses on news, views and tips about commercial property and the industry.