What's the state of the commercial property market?

With speculation rife over the nature and existence of a housing bubble, the commercial property market hasn't been getting as much attention. So, what's going on?

Well, the commercial market is doing “relatively okay” overall, says CommSec Senior Economist Savanth Sebastian.

“It's holding up a lot better than the residential market because that's where investors have been piling in,” he says.

But the situation is far from uniform across the country.

Hotspots

Sebastian describes the Sydney and Melbourne markets as “very buoyant”.

“There's no question that's where the most heat and strength has been,” he says.

“Parts of regional NSW, and even regional cities as well as Canberra, are doing relatively well too.”

Effective rents for Sydney and Melbourne are growing at unprecedented rates, according to Colliers International’s latest metro office report.

“Sydney’s CBD fringe was the fastest growing market in the country, with effective rents growing a whopping 30.7 per cent over the year to March 2017,” says the April report.

“Melbourne’s City Fringe also grew by a very healthy 22.7 per cent over the same period.”

But with demand for residential property also soaring in these areas, commercial investment opportunities have tightened and property prices have increased.

“The older commercial property is being converted into residential and taking stock out of the market,” says Sebastian.

Not-so-hotspots

The picture is very different away from the southeastern seaboard, in areas where the mining construction boom is winding up.

“In Perth, a significant level of over-leveraging has taken place and it's a similar story across the Northern Territory,” says Sebastian.

Vacancy rates in Perth hit 22.5 per cent in January due to negative demand for office space and new office stock added to the market, the Property Council of Australia reported.

“I think there's a lot of pain yet to come for those two states, particularly with the gas projects coming to completion in the NT and the de-leveraging that needs to take place in WA,” Sebastian adds.

But in Queensland, the market is showing signs of recovery.

“Queensland has been relatively soft for a while,” Sebastian says, “But I think there are better days ahead with the market likely to improve with Commonwealth Games, and the low Australian dollar helping to boost a number of sectors – from exports to education to tourism.”

Overall, commercial property investors are seeing yields fall, Sebastian observes.

“But that yield compression can only take place for so long,” he says.

“It may be that you've got wait to see if the market shifts and valuations ease a touch, particularly with interest rates likely to rise.”

“Also keep in mind that the regulators are now turning their attention to the commercial property sector – with a focus on lending standards.”

Want to keep one step ahead? Sign up for our monthly enewsletter, full of insights and tips to help you in your day-to-day.