2022 Perth Commercial Property Trends
What a difference twelve months can make, especially in the Perth commercial property market.
In 2021, inflation was looming but was not seen as a pressing concern given most thought that interest rate hikes were some way off given the RBA said they wouldn’t start raising until 2024. In 2022, they certainly had an impact, and off the back of the pandemic recovery, here are the outcomes that Lever Property can share about the year in commercial.
Industrial property performance
Industrial property continued to be the best-performing asset class in 2022. Owner-occupiers soaked up the supply of any vacant building from an investment point of view, with rising construction costs, interest rates, building delays, and the lack of new products entering the market, significantly squeezing demand.
The end of 2022 saw record low supply in the industrial market across Perth, driving commercial leasing rent and rates to rise. Because of the restricted supply of premium properties such as workshops that have features such as high power, high truss, cranes etc, rents skyrocketed. In some cases, as much as 40-50% was seen during the last 12 months.
An example of the demand was evident with rents applied to hardstand. 12 to 18 months earlier, in most cases, rents weren’t being charged for hardstand in addition to the improvements. By the end of 2022, rent was being charged on hardstands because they were such a premium, and securing land that was associated with industrial buildings became very difficult.
More broadly, the overall commercial property market continued to tighten, renewals with upward rental reviews became commonplace, and tenants became conditioned to the higher rental market given the scarcity, having to meet the asking price to support their operational requirements.
This flowed through to increased lease terms across the board given that from a tenant’s point of view, they were trying to lock in surety of the occupancy as alternative options were scarce, shifting the industrial market to an owner’s market, which is a stark contrast to the past 7-8 years.
Mining Sector Influencing Property Performance
The industrial trend is likely to continue with limited new supply, increased construction costs and competitive labour markets, all being prevalent at a time when commodity prices are elevated, allowing for mining service-related businesses to increase prices and mining companies to be able to absorb it.
Another example of the strength of the mining industry was the West Perth office market which saw significantly improved tenant demand. According to the Property Council of Australia, this resulted in 15,500 sqm of net absorption in 2021, a 10-year high, followed by 11,500 sqm of net absorption in the six months to June 2022 alone, dramatically reducing headline vacancy over the same period from 22.1% in December 2020 to 15.3% as of June 2022.
The Effect of Interest Rates
Interest rates will continue to be a significant theme and driver of asset prices over the near term and will need to plateau or exhibit stability before investors start jumping in once more.
During the last 18 months, the Reserve Bank of Australia increased the cash rate target from 0.10% to 3.10%. At the end of 2022, the big 4 Australian Banks have estimated that the cash rate will rise to 3.35% (ANZ), 2.85% (CBA), 2.85% (NAB), and 3.35% (Westpac). We expect some softening across all asset classes as the interest rate effects start to flow through, however, this was not felt in a liquidity fuelled 2022.
Which Commercial Properties were trending?
Over the last three to four years, investors have gone from very low borrowing costs to having almost doubled over the latter half of 2022.
Even so, there were still assets transacting but they largely took the alternative form of older assets to be repositioned. In doing so, owners aim to get premium rental yields by upgrading assets for the market’s needs.
Commercial properties were moving very quickly throughout the first half of 2022 and given this increase, property availability slowed markedly in the latter half.
As an example, small industrial units worth less than $1m were sold very quickly in early 2022. They were quite expensive, but borrowing costs were quite inexpensive. As a result of the movement then and the market conditions that changed, property availability slowed considerably in the last six months of 2022.
Bigger assets were in scarce supply and whilst they were still transacting, the demand is high and competition, fierce.
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As a boutique, full-service commercial property partner, Lever Property is known and trusted for serving the needs of owners and investors in the Perth commercial market.
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