Commercial property trends to watch in 2024

Concerns around the cost of capital and an uncertain rate outlook have dominated the commercial property market for the last year, and all asset classes have been impacted.

But while a rapid rise in interest rates would typically signal an equally rapid downturn in property prices, in 2023 the response was far more controlled than many expected.

It’s a process Laurence Hart, National Head of Property Lending at Macquarie Business Banking calls an "orderly unwind.”

“Normally, in a big downturn we’d see a rush of forced sellers,” says Hart. “This time the response has been much more controlled. Investors may have sold below previous book values, but so far we haven’t seen defaults or forced sales at whatever price they can take.”

Hart credits this in part to a change in the banking environment. Many investors also came into 2023 with lower leverage than in previous years, giving them sufficient equity buffer to ride out the downturn.

Trends and dynamics in the traditional sectors of office, industrial and retail also continued to feel the fallout of a long-running evolution in social and community behaviours and expectations.  

In the office sector, the force of hybrid work continues, with large occupiers focusing their leasing on high-quality space to boost productivity and incentivise employees to return to the office. This has led to a polarisation – increasing demand for premium-grade office space over lower-grade buildings, aided by shifts to minimise operational carbon emissions.

Consumer interest in online shopping and ecommerce supported a strong demand upswing for warehousing and logistics space. Many shopping centres upgraded their infrastructure to provide retailers with three ways to access the market – in store, click and collect, and online delivery.

Warehousing and logistics performance was strong in 2023, due to low rental vacancies and elevated demand. David Roberts, Head of Real Estate Strategy at Macquarie Asset Management, believes Australian warehousing distribution is the strongest globally in terms of fundamentals. “Vacancy rates are very tight,” he says.

Long-term lens on the economy

Successive rate rises in the early part of the year took the market by surprise, and a significant jump in the cost of capital has impacted commercial property transactions and pricing.

But while it has been a challenging period, the long-term outlook remains optimistic. With relatively good economic performance and strong population growth ahead, doing business in Australia has a lot of positives in the current market. However, global trends may signal further pricing challenges in the near term.

“Generally, the Australian commercial property market tends to lag behind what we see elsewhere,” Roberts says. “We’ve seen pricing corrections in the US and the UK and Australia’s adjustment is just lagging by three to six months.”

As we approach 2024, the patterns of 2023 are likely to shape investment opportunities across four commercial asset types.

01

Residential: Build-to-rent and student housing

The current housing supply shortage will eventually lead to more domestic capital investment in the build-to-rent space, says Roberts.

A relatively new concept in Australia, build-to-rent involves building large-scale, multi-unit rental housing which is held by a single owner and professionally managed. Build-to-rent is common in the US and Europe, offering security of tenure where the focus is on maintaining high occupancies and allowing tenants to treat the property as their own, such as by having pets and being allowed to redecorate.

“In 2024, we can expect to see more construction activity in build-to-rent, adding some additional supply, though the sector remains a small fraction of overall housing needs,” he says. “While we’re seeing more institutional capital from overseas in this space, in the next five to 10 years it’s likely we’ll see more domestic capital and super funds investing in build-to-rent and other residential types given the sector’s resilient cashflows.”

International students have also returned to Australia, adding to housing demand. In August 2023, 8,120 more international students arrived than the same month last year¹. With limited options located either on or near university campuses, students are being pushed into an already undersupplied rental market, driving demand for all rental housing types, including student accommodation and build-to-rent.
 

02

Commercial office: Sustainability and the rise of curated workplace experiences

The way commercial offices are used and designed is evolving. According to Anthony Henry, Design Director for the Metro Martin Place Project at Macquarie Group, two themes are emerging for 2024.

The first is an increased preference for high sustainability ratings, with tenants committed to meeting their carbon emissions targets and protecting the wellbeing of their employees.

“The supply chain that’s involved in building workplaces, the involvement of social enterprise, and the quality of the indoor environment are becoming more important to people,” Henry says.

“We need to think about personal wellbeing and creating healthy positive places to work through environmentally friendly materials, finishes and energy consumption.”

There is also a collective re-think around how office spaces are used in a hybrid working world. 

“It’s still important to have a centralised place where people can come together, but we need to look at why people are coming to the workplace and create more purposeful spaces that provide a meaningful workplace experience,” Henry says.

This includes greater integration of technology into all aspects of building design, from conference facilities to digital booking systems and desk setups. The next generation of employees are used to the sharing economy and expect their workplace experience to be tailored to their individual needs.

“We need to start shifting towards real estate-as-a-service and thinking about how we can give people access to a curated workplace experience,” Henry says.

03

Industrial: Warehousing, logistics and data centres driving growth

As the pace of digitisation accelerates across every sector, demand for data centres continues to soar. In 2024 we will also likely see the uptake of artificial intelligence (AI) further amplify the need to process and store data.

“As device software and applications evolve, society’s physical infrastructure must too,” CBRE stated in a recent report on data centre trends. “AI… increasingly needs more data, reliability, lower latency, computing power and proximity to the end user.”

In the first half of 2023, there was approximately 183,000 square metres of data centre space under construction across major Australian cities. In addition, investor intention is relatively high for data centres, suggesting the asset type will continue to attract capital.²

While consumer purchase trends favouring online shopping and ecommerce will continue to drive the logistics industry, we’re likely to also see more diversification in supply chains. This is due to a number of geopolitical factors.

“Organisations don’t want to rely on one importer or one country, which supports demand for warehousing space because we’ll need more storage to facilitate that shift going forward,” says Roberts.

04

Retail: Grocery-anchored retail remains strong and luxury retailers return to CBDs

Sectors where fundamentals are strongest are likely to perform well in 2024, including in the retail space which has been impacted by consumer shifts towards ecommerce and general cost of living pressures.  

“Any retail asset anchored by some of the major supermarket chains have done well through COVID and continues to do well,” says Roberts. “There’s still a lot of capital available for these assets given stable rental profiles. For well positioned regionally dominant and larger shopping centres, valuations are bottoming out and we're starting to see more transactions.”

We’re also seeing the return of luxury retailers back into the Sydney CBD, a trend which Roberts believes is indicative of the future of our cities.

“Around Sydney’s Martin Place, there’s a huge amount of luxury retailers taking space. This is in part to take advantage of cheaper CBD rents. However, they’re also positioning themselves for a future where CBDs move from being primarily office to more mixed use and residential locations, with tourists coming into the CBD to stay and shop.”

Macquarie Group has a team of designers that are charged with imagining and creating offices of the future. Their insights on the future of workplace design, driven by big picture social and economic trends include:
 

01

Maximum utility

 There is a growing desire to maximise the utilisation of buildings, particularly office buildings, to support diverse programs and uses 24/7. A great example of this is the ability for our spaces to support non-profit and other foundation uses, particularly on our lower occupancy days. 

The goals of this are threefold: First, how might we most efficiently utilise office spaces in our cities? Second, how might we further activate urban hubs that continue to be impacted by lower office building occupancies? Third, how might our physical assets be a direct component of our contribution to our surrounding communities, and help our organisation and our people support non-profit, civic, and community-based initiatives?”

Andrew Burdick
Global Design Director, Macquarie Group

02

Inclusive environments

 Employers recognise the importance of supporting their people, especially with their wellbeing, and so office designs now incorporate amenities such as wellbeing studios, parents’ room, all-gender bathrooms, music rooms, multi-faith reflection rooms, end of trip facilities, change rooms, bike racks, including electric bikes for those who like to cycle into the office.”

Bronwyn Goodwin
Director of Workplace Experience, Metro Martin Place Project

03

Moving mindsets

 We see an opportunity to shift to a ‘real estate as a service’ paradigm. This a shift away from static real estate and a built environment mindset. The future workspace teams may select from a diverse range of services and facilities to support changing business requirements. Over the course of a week, a team may transition from ‘team home base’ to a ‘cross discipline project room’ to a day spent in meeting and event spaces. This demonstrates the need for dynamic spaces, to support a more dynamic workforce.”

Anthony Henry
Head of Workspace Design, Macquarie Group

While previously, traditional real estate assets like large-scale shopping malls and mixed-grade office buildings have been staples of the commercial property investor’s portfolio, in today’s market they may offer less defensive protection than before.

However, for investors who can tap into the emerging alternative assets market, there are opportunities in logistics, build-to-rent, data centres and grocery-anchored retail. And as always, it’s important to maintain a long-term view.

“Be patient and wait for opportunities,” Hart says. “While transactions have been slow, it’s likely that pricing expectations will come down – either due to buyer stress or a more realistic outlook on the market and this will create more momentum in 2024.”

“There’s always a possibility the turnaround could be quite quick,” he says. “We think there are likely to be buying opportunities in 2024.”