Commercial Property Market Reaches a Turning Point
The commercial property market is showing signs of recovery after a challenging two-and-a-half-year period of declining valuations, with experts suggesting now may be the best time for investors to enter the market.
According to Charter Hall, Australia’s largest owner of real estate with over $83.4 billion in funds under management, the market has reached an “inflection point” with industrial, logistics and convenience retail property sectors experiencing minor valuation uplifts in the December quarter.
Steve Bennett, CEO of Charter Hall’s direct property business, says timing is crucial for investors looking for maximum returns in the commercial property sector. “Commercial property investors want to know when the market is going to turn,” Mr Bennett said. “They’re asking about the right entry point and for long-term investors seeking stable income and exposure to a quality commercial property, increasingly that answer is now.”
After peaking in mid-2022, some commercial property sectors saw valuations fall by approximately 25 per cent. However, several positive indicators suggest a recovery is underway, including significant supply constraints in the construction of new commercial properties.
Charter Hall estimates it currently costs between 25-45 per cent more to build than to buy an equivalent office building, with costs potentially higher depending on location and property specifics. For industrial and logistics properties, building costs are often around 20 per cent higher than purchasing existing stock.
The construction slowdown is creating favourable supply-demand dynamics across all real estate sectors, which benefits existing property owners and investors. “Construction risk is high because developers need to get through DA planning, financing and leasing, and find skilled labour,” Mr Bennett said.
“The big players are finding that often it doesn’t make economic sense, and this pullback is impacting supply, which combined with the push [to get people] back to the office, is increasing demand for sectors such as office.”
This supply constraint is particularly significant for CBD office projects, which can take four to seven years from concept to completion, with the planning process alone often requiring several years.
Additional factors supporting the commercial property market include Australia’s strong economic outlook, strong employment figures, and population growth projections. Charter Hall’s group chief executive, David Harrison, said these demographic trends will help.
“Looking 10 years ahead, Australia is forecast to see its population grow by 3.9 million people,” Mr Harrison said. “To accommodate this growth, Australia will need to build additional supply across all real estate sectors, the size of Brisbane and Adelaide combined.”
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