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An expert is calling on commercial landlords to brace for a market shake-up in 2023, with a forecasted pricing reset expected to impact assets in different ways.
Dwight Hillier, Colliers’ managing director of valuation and advisory services, said the current trend of investors favouring high-quality properties will continue to affect the office and retail markets, widening the already existing divide between premium and secondary assets.
However, when it comes to the industrial sector, the expert predicts investors will pay more attention to properties with shorter lease expiry profiles, which allows for an opportunity to increase rental income in the near future.
The weighted average national industrial prime rent (net face) grew by 21.7 per cent in 2022, which was six times the 10-year average of 3.6 per cent per year, according to Colliers’ data.
Rents are also expected to increase by another 6.0 to 8.0 per cent in 2023 due to the supply and demand imbalance persisting over the “short to medium term”.
“The softening of yields to date has outpaced rental growth, and industrial prime capital values have fallen on average by 6.2 per cent nationally since the peak in pricing in Q1 2022.” Mr Hillier said.
According to Colliers, an estimated 7 per cent increase in rents will be required to preserve industrial asset values for every 25 basis points (bps) that yields soften.
Colliers’ current analysis predicts yields will soften a further 50 bps by mid-2023 and then stabilise thereafter, taking the national prime yield to just over 5.25 per cent.
“While industrial has been heralded as the golden child this year, the office sector proved most controversial as it became clear that emphasis on ‘return to office’ and occupancy numbers were outdated predictors of demand.” Mr Hillier said.
In the office market sector, the expert noted that the value of office space has “evolved” in the post-pandemic era to “emphasise employee experience over headcount-to-space ratios.”
Sarah Hughes, Colliers’ national director for tenant advisory and occupier services, noted at the end of 2022 that office spaces are now being valued using non-traditional methods, which has led to a change in how commercial landlords operate — a sentiment echoed by Mr Hillier.
“The opportunity presented by premium and A-grade office assets will increase at the end of next year as investor appetite grows in alignment with occupier preferences post-pandemic, ensuring yields remain resilient.” Mr Hillier said.
Colliers’ analysis shows that the national weighted average capital value for offices reached its peak in June 2022, which marks the beginning of the expected 12 to 18-month market cycle leading to relative stability by the end of 2023.
Mr Hillier predicts that the CBD national office weighted yield will decline by around 45 bps for premium grade, around 100 bps for A grade and over 150 bps for B-grade assets from the market peak of June 2022 until the trough of December 2023.
Reduced capital values over this period will also highlight quality assets, with the average CBD capital values of premium and A grade predicted to only edge down by around 5 per cent and 12 per cent, respectively.
However, the decline will be more precipitous for B-grade assets, which are predicted to decline by as much as 20 per cent.
“We can also see it’s likely that capital values for premium and A-grade stock will exceed pre-pandemic numbers across 2024 and 2025, while B-grade landlords will benefit from repositioning assets.” Mr Hillier said.
Meanwhile, the retail sector, which suffered from lockdown restrictions, has adapted quickly and was the first to reprice, according to Mr Hillier.
“Average retail yields are remaining broadly stable until the end of this year, and assets that expanded their role as essential community infrastructure have taken the lead on recovery.”
To capitalise on localised shopping habits of consumers, the expert cited that landlords in regional malls are now allocating up to 40 per cent of Gross Lettable Area (GLA) for an experienced-based retail offering, and the increasing prevalence of childcare and other new features in these centres indicated the future of retail’s enhanced community role.
According to Mr Hillier, quality retail assets in prime catchment areas that are regarded as “community pillars” are expected to maintain their high value, as income growth will outweigh any potential value erosion caused by changing market dynamics.
“With big capital eyeing the prospects of Asia-Pacific markets over the US and Europe for growth next year, the flight to quality will shift from being a trend to being a key driver for evolution in the retail and office sectors, while the industrial sector will seek to leverage rents to safeguard capital values,” he concluded.
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