The broader impacts of coronavirus could present the perfect opportunity to review your current commercial real estate portfolio

Greater Melbourne has hit the halfway mark on Stage 4 pandemic restrictions. At the same time the State Government is seeking to extend its emergency powers, while remaining non-committal about whether the middle of September will see an easing of restrictions. There is increasing concern being expressed by the business community – from small businesses to large corporates – about the likely impacts on business viability into the future. However, some obvious trends are emerging that are of real interest to commercial property portfolio owners, particularly in the south-eastern suburbs.

The broad economic uncertainties, combined with more specific economic trends that are already emerging from the restrictions in place, are clearly having an impact on the commercial property sector – a quick glance at the Financial Review and industry publications gives a clear indication of the upheaval that is occurring.

However, as in so many other situations, adversity creates opportunity and this current situation may be just the right time for many investors to review their existing portfolios in order to capitalise on some emerging trends.

In this article we consider each of the core commercial property sectors – office, retail and industrial, with a view to providing investors with some pointers to the opportunities and risks that are emerging.

Offices

CBD fringe and outer suburban office space looks set to experience increased demand as employers look to relocate to reduce rent costs, improve employee amenity and get closer to more intensive economic activity such as manufacturing and logistics. This trend had been occurring even before the pandemic hit. However, the added pressures on CBD office spaces, where physical distancing is difficult to ensure and large-scale air-conditioning and ventilation systems may not be adequate for future needs, are likely to see this trend reinforced.

It may be that older and larger suburban office spaces also need to be updated to meet the surge in demand in new expectations with respect to the physical office environment – however, with an expected uptick in demand, this could well be an investment worth making in its own right.

Retail

Physical retail, particularly in shopping centres, has suffered significantly as a direct consequence of both lockdown periods. While the easing of lockdowns will bring some respite, the reality is that many businesses that previously relied on a physical retail presence will increasingly and, in some cases, exclusively move online.

However, with as with office real estate, changes in community behaviour mean that there is likely to be a greater trend towards shopping locally and this may see a medium-term increase in suburban retail opportunities as the economy begins to return to normal. In particular, with people continuing to maintain caution about close physical interactions and crowds, there is a real emerging opportunity with respect to suburban strip shopping areas, which have slowly been declining over recent years.

Industrial

Industrial real estate presents significant opportunity for investors – whether it’s rethinking existing industrial real estate and how it can be configured to suit the rapidly escalating demand for warehousing and logistics capacity and likely increases in local manufacturing, or looking at a new industrial investment, or capitalising on a maturing investment and selling into a currently strong market with high demand.

Current and prospective commercial real estate investors in Melbourne’s south-eastern suburbs are perfectly placed to benefit from the significant changes in the economy at the moment. If you are considering a review of your commercial property portfolio, it makes sense to discuss the opportunities with an expert at Just Commercial.

What does the future of industrial and commercial real estate look like with the shift to online purchasing? 

Over the past few years e-commerce and online shopping have become a crucial part of business, real estate and our personal lives. People have changed the way they shop, and businesses have changed the way they do business, in line with this emerging trend.

As a direct consequence, the real estate industry has seen an increase in the need for warehouses, to meet the growing demand of e-commerce. While online shopping and e-commerce has seen a steady double-digit growth in previous years, growth has accelerated considerably in 2020, as a direct result of the coronavirus pandemic.

Many people have been forced into online shopping due to the stay at home restrictions put in place by Australia’s state and Commonwealth governments, in order to manage the spread of the virus. While some may never have entertained the option of online shopping in the past, many have now discovered the convenience of shopping this way and experts believe that this trend will continue, even after everything returns to normal.

The huge surge in online purchasing has resulted in a rapid structural shift to e-commerce, with the need for warehouses increasing at an exceptional rate. Accordingly, businesses that have been late to the e-commerce party are now having to lift their game quite quickly. Those that haven’t kept pace with the e-commerce boom in such a fast-moving market are now being forced to rapidly adapt to the online orders increasing as a result of the pandemic.

The pandemic caused the commercial real estate market to experience a monumental shift. While in the past Industrial real estate hasn’t struggled, nothing compares to the sudden increase, felt as a result of Covid-19. Overall, the outlook for the industrial market is bright. This is because, as an asset class, it is better positioned than many other sectors to overcome the changes imposed by the pandemic. So, how exactly will this sudden amplified demand for industrial property, due to the shift in online behaviour, impact industrial and commercial real estate?

Experts believe that this change in buyer behaviour is permanent, and retailers are responding. They are looking to redefine their futures that have been brought forward by three years’ worth of growth occurring in a very short time.

Many will be needing to secure distribution hubs and we expect that coming out of the pandemic there is real potential to see the repurposing of retail assets for distribution hubs. Fringe areas will be in higher demand and will experience rental growth for industrial property such as warehouses and manufacturing sites. Operators will also be rethinking their supply chain models, focusing on accessible inventory in facilities that are designed for faster delivery and holding more stock onshore. This is all aimed to avoid gaps as a result of interrupted supply chains.

A spike in manufacturing activity within Australia is also widely anticipated, so that less manufacturing is being sourced offshore. This will be a part of the emerging strategy for many businesses that will be seeking to ensure that their supply chains are as strong as possible and protected against any possible future disruptions. Any increase in onshore manufacturing will lead to an increased need for real estate, once again seeing an increased need for industrial spaces in the future.

A shift towards online behaviour might also see warehouses and industrial spaces change shape, in order to adapt. There is the possibility, as local manufacturing increases and the requirement for real estate surges, that multi-level warehousing might be introduced so that industrial hubs can expand production and support the growth of their online retail sales.

The need for space will exceed what is available in industrial hubs and these hubs will need to move further increasingly into the rural/urban fringe. We may also see warehouses becoming multi-use, with spaces having to ‘smarten up’ with technology, to allow pick up directly from warehouses and premises that also act as showrooms as well as storage spaces. This would mean that businesses can do more within their space and don’t have to move out of prime industrial areas into more regional hubs.

The growth we have seen as direct result of the coronavirus pandemic will change the future of industrial and commercial real estate as we move forward, if our online behaviours continue. From multi-level to multi-use warehousing and improved technology to pick up orders from hubs, the opportunities in the coming years are considerable.

While no one can tell us what the future holds for these real estate sectors, we are confident that the future of industrial and commercial real estate is full of promise.

The driving demand expected for Melbourne’s industrial real estate sector, post COVID-19

As we have watched the Covid-19 pandemic push many industries into chaos, everyone expected the same to happen with the commercial property sector. There is no doubt that the retail, management and hospitality sectors, represented in the property market by shopping centres, offices and hotels, are all currently facing significant challenges. Yet, while these sectors and the general population are adapting to Australia’s new economic normal, industrial property looks set to boom in the coming months.

While many retailers temporarily closed storefronts in response to government-imposed lockdowns, customers have still wanted to buy. Orders and deliveries have increased as customers who would normally have visited storefronts opted to shop online. From a property perspective, as volumes have dropped from traditional retail, there has been a responding increase in demand for warehouses and distribution centres, to cater to the increase in online purchasing. The e-commerce sector has grown 80 per cent, compared to the same time last year, in the first eight weeks of the pandemic, with volumes reflecting levels normally only seen at Christmas time.

As COVID-19 restrictions ease, the acceleration and saturation of online sales is expected to slow down. However, experts in the sector believe that it won’t revert to pre-lockdown volumes. Australia Post even delivered some insight into their current operation stating, “The recent growth we’ve seen suggests that by 2025 online shopping will account for 16-18 per cent (of parcels) compared to 12 percent in early 2020”.

As was the case before the pandemic, the sector towards the construction of bigger warehouses with greater levels of automation, to cater for an acceleration in online shopping and a more digitally connected consumer. This is ultimately expected to lead to increased demand for industrial real estate post COVID-19.

All Australian capitals are expected to experience direct growth in industrial property markets as a result of activity during the pandemic. However, Melbourne’s industrial property hubs are projected to demonstrate more growth than in any other state. Melbourne’s industrial market is forecast to reach its highest level in 10 years during 2020. Already Melbourne’s industrial land values are growing at the highest rate nationally, at 22.8% for 1.6 hectare lots over the past year.

As Victoria is a hub for national distribution activity, it comes as no surprise that Melbourne’s market will benefit hugely from a continued rise in demand. The unique combination of proximity to a major CBD, but with the benefit of significant amounts of real estate space within the outer suburbs, makes Victoria the ideal location. Large warehouse spaces supported by quality transport infrastructure can be located in close proximity to major company offices located within the business hub of Melbourne.

Another driver for the unprecedented demand in the sector is that capital allocation to the industrial and logistics asset class has now surpassed the volumes seen within the retail sector. This shows a material shift in investor appetites, with industrial and logistics seen as the key to stable long-term value and growth.

Trends like this indicate that demand is not expected to slow anytime soon. Vacancy rates for sought after warehouse and industrial spaces are not projected to increase in the near future. Rather, there is a projected chronic shortage of industrial and logistics space from Dandenong to Keysborough, offering real benefit to landlords.

Post Covid-19 demand in the Melbourne market, combined with already low vacancy rates, will likely prompt speculative warehouse developments around the state. This rapidly evolving market is creating opportunities for developers to undertake projects that will can capitalise on tight vacancy rates in areas in high-demand areas.

It is likely that more industrial property will be developed over the coming years to meet the needs of our population’s newfound for love for online purchasing. A shortage of cold storage space and need for dangerous goods handling is also likely to drive demand for sheds and warehouses.

Any uncertainty felt within other sectors, due to the pandemic isn’t being directly felt within industrial property. The sector is showing no hesitation in moving forward with the expected and current increase in demand. Melbourne’s industrial real estate market is set to be one of very few sectors to see an increased in economic and financial activity during and following the pandemic. It will likely emerge from what was expected to be an incredibly difficult time, stronger than ever. An unexpected yet positive outcome for all those within the sector.

Industrial property tipped to exit pandemic most unscathed

According to new research warehouses and other industrial property will likely be the commercial asset class, to emerge after the pandemic, as most unscathed.

While previously Australia waited to witness the direct social and economic impacts the pandemic would have on the property market, now that restrictions are beginning to lift, we are slowly getting a glimpse into what the future is set to look like.

Prior to COVID-19 the industrial property sector had seen growth, with high investment from international groups, in the Australian market. However, just like almost every other sector, the industrial property sector did take a dip following the onset of coronavirus restrictions in Australia. Unlike other sectors, at the moment the demand for industrial property is expected to rebound, with a continued increase in revenue in the coming years.

Industrial property, especially prime-grade assets, in Melbourne were showing to be incredibly resilience at this point, given the state of the economy. In some areas, despite the work from home orders from the government, office space is outperforming industrial property. While this is expected to be short-lived, the areas that already see industrial property outperforming office space are only going to witness a further increase in that margin, as the pandemic continues.

Development activity in Melbourne over the past year has been strong with the continuing increase of industrial spaces. With south-east Melbourne being the most popular destination in the state for industrial property, it is expected to outperform other areas in the following months.

During the stay at home restrictions, online retail in Australia saw a huge increase in sales, as storefronts closed over the country. Due to this third-party logistics companies with capacity, are looking to secure more industrial space to accommodate the demand. This could lead to a huge demand for warehousing over the next six months, especially in Victoria, since it is the hub for national distribution activity.

Retail isn’t the only sector that may be looking for more industrial space, with the current situation resulting in an increased demand for home delivery services. This is where cold storage facilities especially are set to benefit. The requirements for increased cool room and freezer space will be seen across Australian CBD’s, specifically hubs for hospitality and restaurants such as Melbourne and Sydney.

Over this time, we also expect to see an increase in demand for Australian products. The inability we now have to bring a large amount of stock in from overseas, is making customers more conscious of the safety behind where are receiving imports from.  The reduction in export and import activity delivers a huge opportunity for greater locally manufactured goods and services, which can be easily and quickly distributed into the local communities and across the country. Reinvigorating Australian manufacturing of goods and services will result in the need for bigger and more industrial spaces locally. Once again increasing the reliance on the industrial property market for our ability to continue to increase our local supply chains.

Nonetheless, after the pandemic is over securing adequate storage is likely to be the first thought for many companies who saw an increase in their business as a reaction to the restrictions. This will lead the way for industrial property needs to increase even following the pandemic, depending on how long we remain in a crisis state.

This demand for industrial space is expected to remain strong throughout the pandemic and beyond. The situation might also give a boost to local manufacturing activity, which could further stimulate industrial sales and leasing activity.

Suburban Melbourne’s commercial real estate fundamentals are strong

As governments around the country begin to ease social distancing rules an interesting commercial real estate trend is emerging which is set to create opportunity for investors focused on suburban and outer suburban markets.

Commercial analysts and business reporters have noted significant negative impacts on CBD commercial real estate markets, including for Melbourne’s CBD. In particular commercial office property in CBD markets looks set to take as much as a 15 per cent hit on value. The drivers for this are two-fold.

 

First, many businesses have been hit by the close down of the economy during the imposition of strict interpersonal isolation measures.

Second, and perhaps more importantly, the dramatic rise in work-from-home arrangements, combined with reassessment of exactly how office spaces will need to be configured to allow “safe” working environments in the future has many white collar businesses considering alternatives to cramming staff into expensive CBD office space.

There are reports that a number of large corporations are seriously considering whether to remain head-quartered in CBD offices when there are fringe CBD and suburban opportunities available that are considerably more affordable and will allow the appropriate amount of office space per worker when business and office attendance starts getting back to normal.

An additional variable is concern about the health and safety impacts of work commutes, particularly on public transport, where employees are clearly more exposed to potential infection.

Consequently, well serviced commercial real estate markets like Melbourne’s south-eastern suburbs look set to benefit from potentially major changes in office rental demand. And it’s not necessarily a short-term trend – a recent article in The Australian indicated that CBD office vacancies are not likely to peak for at least two years – investors in those spaces are likely to experience significant reductions in yield as vacancies soar and rent waivers and deferrals remain unmet by struggling businesses.

Even where businesses decide that a CBD presence is warranted or necessary, many are looking to “hub and spoke” office models, where a small CBD office presence is supported by larger back office support which is headquartered in outer suburban areas.

Many businesses will be looking for ways to maintain efficiencies, reduce the impacts on employees of difficult commuting options in the context of social distancing and deliver safe and healthy work spaces at affordable rates. Businesses are even having to consider issues such as how employees enter buildings and the efficacy of using lifts and elevators in the context of social distancing – an issue that is much more manageable in lower density suburban office space.

However the easing of social and economic restrictions plays out over the next few months, it seems clear that the commercial real estate opportunities for suburban and outer suburban areas like Melbourne’s south-east will continue to benefit from an already strong base.

Melbourne’s strong fundamentals positive for commercial real estate

In the midst of social and economic lockdown, most landlords and vendors think the world has stopped. But Melbourne’s strong commercial real estate fundamentals coming into the pandemic have continued through and activity, particularly in Melbourne’s commercial suburban market, is continuing strongly.

Just this month, for example, realcommercial.com.au has reported significant commercial real estate activity, including leasing of a large multi-level office site at Box Hill and sale of a large development site at Glen Waverley with zoning for residential aged care https://www.realcommercial.com.au/news/box-hill-offices-take-top-billing-in-victoria.

Much of the reported concern about the immediate future of commercial real estate has focused on two things:

  1. Retail is under considerable pressure due to social isolation measures and online shopping will become the norm.
  2. The move to working from home signals a paradigm shift in the way that people will work into the future.

While there is some element of truth to these concerns, perhaps the hype won’t be realised. The reality is that Australians don’t like being cooped up at home with limited social contact and physical interaction. The Victorian government is now talking positively about serious easing of restrictions once the current state of emergency is over on May 11.

Retail must bounce back – it may take some time, although analysis of jurisdictions where governments have already started to lift restrictions indicates that shopping centre attendance is nearing pre-pandemic levels already. Online shopping is not a new phenomenon – it’s one that retailers have been facing for some time. But there is a significant proportion of the population that still wants to try on shoes before buying rather than taking the risk of ill-fitting footwear manufactured overseas!

Interestingly, much of the commentary about a permanent move to working from home is coming from individuals and sectors which already do it or will benefit from it in terms of substantially reduced costs. But, again, most Australians want to work with colleagues face-to-face. And we only have to listen to anecdotes about spouses sharing trips to hotels in order to get work done away from the kids to realise that the end of the office is nowhere near in sight!

The final material opportunity presenting itself to commercial real estate investors is the likely increase in domestic manufacturing as governments seek to stimulate the economy and address impacts associated with dramatic increases in freight costs and negative sentiment towards imports, particularly from China.

Melbourne’s south-east is particularly well suited to light and medium manufacturing, transport infrastructure and facilities available. A push to increase domestic manufacturing could result in a small boom in light manufacturing zoned real estate in the region.

There is no doubt that the commercial real estate market will experience change as a consequence of the COVID-19 pandemic and there is undoubtedly some short-term pain for both landlords and tenants in some areas. However, the opportunities loom large and, with market fundamentals as strong as they already are in Melbourne, our city could stand to benefit considerably.

Coronavirus implications for Melbourne commercial property market – what’s in it for property investors?

It’s hard to escape the dominance of the economic impacts of COVID-19 in media and business reporting. Governments and businesses around the nation have been focused on it and there have a been a range of responses aimed at addressing the impacts on commerce. In relation to commercial property, the impacts are evident for both landlords and tenants.

Retail property is particularly heavily hit, with major reductions in retail shopping traffic as a consequence of social isolation measures. Of course, there has been considerable debate around the respective roles of tenants and landlords with respect to rent relief. Various government approaches around the country have been either applauded or criticised – the Queensland government coming in for particular criticism for introducing measures heavily weighted against landlord rights.

In this context, the Victorian government has been seen to attempt to strike the balance right, introducing a $500 million dollar rent relief package aimed at securing positive outcomes for both landlords and tenants. Some $420 million of that is targeted land tax relief for landlords aimed at providing them scope to ease the burden on tenants who have experienced declining business conditions. This is one of a raft of government funding responses to the unprecedented economic challenges facing Victorian businesses and time will tell whether or not it is more or less effective in staving off the worst of the impacts.

However, while governments are quite rightly focused on the immediate responses to the COVID-19 challenge, some in the economy are looking to opportunity and what happens beyond the current social and economic lock down.

The question we ask is what are the opportunities that will emerge in the commercial property sector over the next six to twelve months?

One of those opportunities clearly relates to light and medium manufacturing. A key impact of the pandemic has been the reduction in export/import activity driven by a range of factors including some negative sentiment to Chinese manufactured goods, dramatic increases in freight costs and an emerging sentiment towards reinvigorating Australian manufacturing.

With travel expected to be muted for at least twelve months and governments looking to increase economic stimulus and job creation in Australia, it is only logical that light and medium manufacturing enterprises will be favourably supported as the economy starts to open up again.

In the office space, while there are immediate challenges, and there will undoubtedly be material changes in the way Australians work into the future, there is also likely to be ongoing growth in demand for quality office space, particularly in urban and peri-urban areas – that is, outside CBDs. This emerging trend taps into pre-virus trends which saw an increased interest in outer suburban quality office space, offering a broader range of amenities for workers without the commute.

Another interesting observation is that, while shopping centre retail in Australia is still subdued, analysts looking at trends in other economies, including Singapore, have noted that shopping centre retail and foot traffic has lifted substantially and is approaching nearly the levels experienced prior to the pandemic. https://theurbandeveloper.com/articles/ubs-give-three-coronavirus-pandemic-scenarios-for-a-reits  Is this a sign for Australia’s recovery? It’s hard to know at this stage but the indications are positive.

Whichever way the economic recovery shapes up, there is no doubt that the way business is done will change and that will have implications for the commercial property sector. The challenge is to recognise the negative impacts and look for the new and emerging opportunities. Melbourne’s south-eastern property market presents a number of unique opportunities to capitalise on the new economy.

March 2020 Update

It’s business as usual for Just Commercial.

We are playing our part in helping to stop the spread of COVID-19 by following the advice passed on by the Australian Government, and as such our team are working remotely.

Our staff, clients, and the general public are of the utmost importance to us. We are fully operational and accessible at any time, so please do not hesitate to contact us as you normally would.

We are continuing our business operations across our portfolios of Property Management, Rental Collection & Disbursements, ESM Compliance, Accounting and of course, Sales & Leasing,

Just Commercial is your partner through both good times and bad. If there is anything we can do to be of assistance during this challenging time we are happy to help.

Kind regards,

The Just Commercial Team.

Steven Kalb | 0408 499 909 | steven@justcommercial.com.au

James Taylor | 0418 538 039 | james@justcommercial.com.au

David Kalb | 0499 333 123 | david@justcommercial.com.au

Con Devatsakis | 0407 046 934 | accounts@justcommercial.com.au

Aviva Basist | 0438 866 626 | aviva@justcommercial.com.au

Christine Bonacci | 0414 464 080 | christine@justcommercial.com.au

Jeanne Pickering | 0418 391 661 | jeanne@justcommercial.com.au

Dani Rosengarten | 0418 382 044 | reception@justcommercial.com.au

Is commercial property investment out of reach for smaller punters? Think again.

Residential property investment is a bit of a national pastime for Australians – more than two million Australians own at least one investment property. In fact, CoreLogic estimates, the overall value of residential real estate across Australia to be $6.5 trillion across 9.6 million dwellings. As an asset class, housing is now worth more than three times the value of superannuation funds across the country ($2.0 trillion) and more than four times the value of Australian listed stocks ($1.5 trillion). It is further estimated that investors own 27% of Australian dwelling stock by number and 24% by value, while about 47% of the value of new mortgage originations are for residential investments which provide the vast majority of rental housing across Australia.

That is an enormous amount of investment capital and economic activity, driven largely by Mum and Dad investors. But many residential property are tentative about commercial real estate investment and feel that it is outside their capacity to participate in the sector.

However, the reality is that a savvy commercial real estate investment is within the reach of many residential investors.

Commercial real estate market, realcommercial.com.au, notes that while the two markets are very different and building a strong commercial property portfolio can be challenging and presents a different risk profile to residential investment, the wide range of price points and potential locations means that commercial investment is feasible for many.

Commercial real estate has many benefits – portfolio diversification, tax effective ownership structures, depreciation advantages, locked in annual rent increases, tenants pay outgoings and diverse price points. There are also some challenges – finance terms tend to be stricter, there are usually larger gaps between tenancies, there is greater exposure to economic cycles, repairs and maintenance can be expensive and commercial properties are harder to sell.

If you think you might be in the market for a commercial real estate investment, there are some key nuances that you should have your head around.

  1. The tenant

The quality and commercial viability of your tenant is critical. Ultimately you want a tenant that is well matched with the property with respect to location, is operating in a strong sector with good long term prospects and is performing well. Acquiring a property with an existing tenant is also desirable.

  1. The lease

Commercial leases are generally longer than residential leases and actually underpin the value of the property. Ensuring the lease conditions are right and taking strong expert and legal advice is critical to getting the most out of your commercial investment.

  1. Economic conditions

Commercial tenants are more exposed to economic and trade volatility. Demand for products and services can be fickle and matching your property with the right sectors is critical.

  1. Location

Location affects value and it affects the type of property you are looking for. Taking a broader view of location also provides a much wider range of price points to consider for similar types of property.

  1. Planning and infrastructure

Local and state government planning and regulation, potential infrastructure developments and location of supportive infrastructure are all important. Consider, for example, the impact on both tenants and building owners from developments such as Sydney’s light rail project, which has seen numerous businesses close down while construction was ongoing.

  1. The property

The property you invest in needs to be suited to the businesses you are hoping to attract, needs to be in good basic condition and needs to be at a comparable price point to the market.