Commercial Property Review and 2024 Market Predictions

The perpetual twists and turns of Victoria’s commercial property cycle have been widely reported and felt by those with skin in the game this year. There’s a lot to unpack from the year that was, as well as a lot to discuss for the road ahead.

With the last weeks of 2023 running down fast, we thought we’d pull together some of our key observations from the year, and give you some expectations over the next 12-months to let percolate over your summer holidays.

General Analysis of Commercial Property in 2023

The RBA’s interest rate pause at 4.35 per cent has been widely welcomed by investors and owners, particularly among institutional players that have had acquisition strategies stifled from increased borrowing costs.

CBD office vacancy rates have remained high, climbing to 15 per cent, however the latest data from Urban Property Australia’s (UPA) Q3 Melbourne Office Market Review paints a picture of continued resilience for the sector.

While average yields for prime office assets dipped to 7.25 per cent and 8.5 per cent for sub-prime, there is still solid tenant demand in the marketplace, especially for premium stock, causing a bifurcation in between A-Grade and lower grade stock values this year.

The same UPA data unveiled that major transactions have played a pivotal role in the market’s resilience in 2023, with metro office sales notching $650 million – 40 per cent of these were recorded in the CBD market.

The Greater Melbourne retail market is a fascinating and positive storyline in 2023. UPA insights revealed that sales have already cleared 2022 levels to $1.4 billion, even as upward pressure on borrowing intensifies, with strong sales activity led by the well-established private market.

Vacancies across 36 of the city’s biggest retail arterials dropped from 10.3 per cent to 6.7 per cent, bringing the figures below double digits for the first time since the pandemic, according to Fitzroys’ latest Walk The Strip report.

As bricks and mortar retail recovered, the rise of ecommerce and its significant role driving the performance of the industrial and warehousing sector cannot be understated. The race for space among transport and logistics entities saw vacancies in the west and north drop below one per cent, while broader vacancy rates across Victoria maintained at one per cent.

Market Forecast for 2024

Perhaps the biggest winner in the commercial property sector in 2023 has been the well-established private market, and we expect 2024 to be another prosperous year for the vertical, as further rate rises price out institutions – allowing private buyers to double-down on aggressive acquisition plays as competition remains subdued.

Australian Bureau of Statistics insights show that Victoria’s GDP per capita increased from $79,455 to $84,740 between 2022 and 2023. As the state’s population grows further, fuelled largely by international students and workers, this should create positive knock-on effects to productivity, increase retail spending and spur demand for commercial spaces in 2024.

Knowing when it’s the right time to sell is critical among any form of property investment. For institutional asset owners and managers, we may see asset-rich organisations sell non-essential investments to create liquidity.

Further decentralisation from the Hoddle Grid to new and established commerce hubs like the Arden Street and Parkville Precincts, as well as suburban business catchments like Cremorne and Box Hill will continue to attract strong tenant demand. We anticipate activity here to be spearheaded by the creative and technology verticals, and businesses with a focus on Pan-Pacific products and services.

If you would like to discuss any of the insights included above in further detail, or enquire about a separate property matter, please reach out to us at info@jonesre.com.au.

On behalf of the entire team at Jones Real Estate, we’d like to thank our stakeholders and associates for their continued support in 2023, and look forward to building on our relationships in the new year!

This article was authored by the below commercial property specialists at Jones Real Estate:

• Paul Jones – Managing Director
• Tim Spargo – Associate Director
• Sam Guest – Manager
• Luke Peric – Senior Executive