Mind the gap

In the commercial and industrial market, we are seeing lower transaction volumes than witnessed in the wake of the 2008 global financial crisis – which is not unexpected given the economic forces currently at play.

Nationally, the total value of commercial property assets over $5 million sold in the first half of 2022 is down 76 percent on the same period last year, while the number of sales has halved.

While in themselves the numbers are not that surprising given the economic climate and upward pressure on interest rates, the sheer drop is quite sobering and looking back over industry data for the past 20 years, I can’t find a six-month period where there was a more startling dive.

It’s thrown into sharp relief when you consider that the volume and value figures in 2021 were at a record high, surpassing the previous highest volume in 2007.

However, when you factor some of the biggest increases in wholesale funding costs into the mix, and the speed at which the cost of debt has escalated, market readjustment was inevitable.

While stock levels are roughly the same as this time last year, and values have softened across all sectors, there are encouraging signs that the ground beneath us could be changing again and while it’s a big call – I think we’re seeing early signs of more certainty for the coming six months, as to what the new landscape will look like.

Construction costs have shown tentative signs of starting to come down, fuel prices have eased back from their eyewatering highs, container costs are coming down off their all-time peaks, residential construction intentions have slowed freeing up the workforce for building in other sectors, and there are indications that inflation and the cost of debt are peaking.

There is also more certainty in the lending environment now, with banks having de-risked their books, while on the ground, we’re noticing the bid-ask gap closing as sellers and buyers adjust to market realities.

Expect to see a lot more action on the commercial and industrial property front in the last third of the year as traditionally, September-December is when a large proportion of annual deals happen.

The progression of the calendar year tends to force vendors’ hands and for many, the decision to sell has already been made so the next phase is – are the buyers wiling to transact, and at what level.

At the upper end of the market, offshore and institutional investors are very subdued with many listed entities trading at significant discounts to net tangible assets.

But, the inertia we’re seeing from investors can’t last forever and there will be opportunity galore in the market.

Those who transact in the coming four-six months will likely have the opportunity to acquire assets that they simply could not have acquired for the same price in the last five years, as a five-10-percent discount seems to be priced into core assets.

Back in 2009-2011 as the market recalibrated post-GFC, some amazing opportunities were snapped up and given that the market is not as leveraged as it was back then, I believe the change cycle will be much faster this time around.

The National Policy Statement for Urban Development (NPS-UD) offers potential for significant higher-density housing and associated amenity in key centres and we discuss the challenges and possibilities.

Having established the networking and mentorship group Bayleys Commercial Real Estate Women (BCREW) in recognition of the increased numbers of women working throughout our commercial and industrial business, we talk to some of the movers and shakers about their property careers.

And, as office workspace requirements continue to evolve, Bayleys’ Coworking+ insights report confirms the rise of non-traditional office space and operational models, so we spoke to some leading operators for their take on the flex space market.

Plenty to mull over – and, as always, we’re in it for the long haul so let’s talk soon.

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