After a challenging 2023, with interest rate increases hampering investment activity affecting values, the outlook for 2024 will continue to be difficult. For many owners it will be a case of treading water and surviving the year with prolonged elevated finance costs until some relief emerges in 2025. While not all investment classes or locations behave the same, transaction activity and demand to occupy stock will certainly continue, but with greater caution and selectiveness. Across the commercial markets there will be opportunities and in these cyclical markets there will always be winners and losers.
The markets which will sustain the best results next year are those which help solve the housing supply crisis across the country. Build-to-rent, student housing, boarding houses, blocks of units and even tourism assets will grow in popularity, in particular by institutional owners. These assets and their strong returns based on residential rental growth rates and demand by overseas students, visitors etc will ensure construction efforts turn to the ongoing supply of beds in 2024.
2. …and sheds
The industrial market has been the shining light of the commercial markets over the last few years with strong increases in demand and lack of supply, the stimulus to strong gains in land values, rents and new lows in yields. While demand levels are expected to moderate, the underlying mismatch with supply will ensure rents continue to grow, however yields will soften aligned to changing cost of finance and depth of the investment market.
3. Institutional assets will come to market
For many funds, buying on tight yields over the last few years will cause a shake up of their investment portfolios and re-rating of risk. As such, expect to see underperforming assets or those which no longer meet the funds objectives come to the market setting new benchmarks for yields and changing returns for investors.
4. Office market woes continue
Total vacancies in both CBDs and non-CBDs have been trending upwards this year, while some markets in particular the Queensland regions have been outperforming, expectations of continued increases are high. Many markets continue to be hampered by high supply and subdued demand which will further pressure vacancies, rents, incentives and yields over the medium term. Flight to quality will continue with occupiers taking advantage of attractive leasing options at discounted rates while grappling with getting staff back in on a more regular basis.
5. Alternatives will do it tougher too
Yields for many asset types achieved unexpected lows in the last few years. While those which offer a “set and forget” option may still be holding strong, rental gains may not meet the new cost of finance which could cause some owners stress. Yields for these assets did not see strong upward movement in 2023, however, are expected to grow in 2024 particularly in secondary locations or asset classes with oversupply or tenant covenants not as strong as once thought.
6. Built form is king
High construction costs are here to stay and competition for labour will increase given the priority of housing and infrastructure projects. As a result, the spotlight will turn towards existing assets which could be recycled or given a facelift at a reasonable price and achieve an affordable rent in lieu of new projects which set new highs in economic rent and are difficult to financially stack up.
7. Distressed sales will increase
For those who can’t survive to ‘25, receiver sales will increase across all types and locations. Savvy private buyers, opportunistic purchasers and new syndicates will emerge looking to capitalise on the difficulties of some owners to hold their assets.
8. Are peak interest rates here?
With inflation still ahead of the ideal band, there is greater concern surrounding the possibility of a further rate rise in 2024. Encouragingly however, 2024 will see peak rates before the RBA are likely to commence cuts in late 2024 or into 2025. For many owners it will be a matter of surviving until 2025, while others will see an opportunity to invest.
Vanessa Rader | Head of Commercial Research