Factors Influencing Perth Commercial Property in 2023
Off the back of a buoyant 2022 for the Perth commercial property market, many market commentators are suggesting that we may be facing headwinds that will result in slowing activity across the board.
While we remain cautious about investment markets, there are still strong fundamentals that will mean certain areas will perform well.
We saw a shift in 2022 that resulted in both the office and industrial leasing market gaining momentum which hasn’t been seen for some time in Western Australia, rental rates had stabilised during the last 2-3 years following multiple years of soft demand, but 2022 saw rates improve off the base that was set in those preceding years.
Looking into 2023, we see rental rate demand continuing to improve. Industrial rents will benefit from limited supply, with higher quality assets attracting a significant premium, as these rates increase, the overflow on effect to lower quality assets will drive rates upward as well as vacancy remains at record lows. The increased cost of construction will also support higher rental rates as developers look to recoup cost increases that have been seen across the board.
The Rise of Suburban Offices
We see suburban office markets continue to rise, particularly for premium assets in the office hubs of West Perth and Osborne Park. While vacancy remains in those areas, this is being absorbed, albeit we anticipate not at the rate that we’ve seen in the past 18 months. Pockets of the inner Office market such as West Leederville will likely outperform, as the limited space increases the tightness of the area. This can be seen by lower incentive being offered, where owners were asking for 30 to 40% incentive during 2018-2021. This has lowered to 25% incentive, which seems likely to continue through 2023.
Overall, we remain buoyant on the office market, being mindful that it is coming off a low base.
Commercial Property Investment
From a commercial property investment perspective, we expect the theme of 2023 will be the effect of interest rates on the volume of transactions. We expect vendor expectations to take some time to adjust to re-priced assets as buyers remain cautious over the short term on where interest rates will end up. We see well-priced assets, and owner-occupier assets still performing very well as cashed-up buyers look to secure premises as they trade off against higher-cost rentals.
The previous 5 years have seen the investment market perform very well mainly fuelled by low-interest rates, as this paradigm changes, investors are no longer diving in and chasing yield compression. Purely on numbers alone, if you’re borrowing at 4 to 5%, on a variable loan for industrial property or for any kind of commercial property, you need your yield to be more reflective of around 7%.
Based on this, we expect to see prices soften from an investment point of view, especially considering the market volume and liquidity, with buyers not as eager because of the uncertainty about further interest rate movement.
Owner-Occupier Demand
Whilst liquidity is pulled out of the investments market, owner-occupier demand is likely to remain elevated for the right properties, mainly as a result of operational requirements. We expect this to continue as elevated commodity prices have ripple effects throughout the economy.
As mentioned earlier, a driving force in the Perth commercial property market is new supply, which will likely remain depressed due to increased construction costs and building delays. Naturally rental rates increase to offset the elevated construction costs, so a new benchmark is being set by limited supply, further supporting the flight to the owner-occupier market.
Overall, in 2023 we are forecasting increased rental rates in both office and industrial assets with inner-suburban office markets outperforming. Investment property prices are likely to remain steady as interest rates create a level of cautiousness in the market, but will be somewhat underpinned by the owner-occupier market, which is likely to consume any well-priced opportunities.
The team at Lever Property has a deeper understanding of the local market and a technology-driven approach, and we work closely with you for the duration of your commercial property journey.
If you are seeking advice on managing or acquiring your own Perth commercial property, contact us today to set up a meeting or find more detail via the links below.
