Doubts loom over key asset class in 2024

Ray White Commercial head of research Vanessa Rader said there was still a lot of uncertainty around the future of office space.

A massive question mark is hanging over Australia’s commercial office sector amid uncertainty over the future of office space and dwindling rental yields on office properties.

Ray White Commercial head of research Vanessa Rader revealed in a note to investors and potential sellers that the sector was facing multiple headwinds that would continue this year.

“As vacancy concerns continue across the office sector, the outlook for this year will continue to be tough for this asset class,” she said, adding that overseas influences were becoming a factor.

“Offshore interest has declined and investment yields are expected to be further pressured upwards until occupancy improves and the outlook for face rents stabilise.

“Opportunistic buyers, however, are likely to seek out assets due to recent price declines in anticipation for the future rebound of the office sector.”

Office vacancy rates remain high in many of the country’s CBDs. Picture: Damian Shaw

Ms Rader said the office sector was initially seeing higher volumes of properties trades after Covid lockdowns ended and more people started trickling back into offices.

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“We saw in 2023 a turnaround in activity for the office sector. This sector was leading the charge in 2022, recording more than 34 per cent of all transactions, and representing close to $23 billion in sales.

“However, uncertainty surrounding the future of office and yield increases saw this sector off the boil, reducing volumes to just $10.8 billion.”

Office trades accounted for 21.7 per cent of sales in 2023, the greatest share of total transactions behind industrial space, which accounted for 29.4 per cent of sales.

Ms Rader added that 2023 saw lower sales volumes across all commercial property types.

She noted that during 2023, there was close to $50 billion in commercial transactions over $2 million, down from 2022, which recorded $67 billion after a record breaking 2021, which achieved close to $95 billion.

Ms Rader said industrial properties may be more enticing for some investors than office space.

“With construction activity remaining limited across the industrial sector, the mismatch in supply and demand has ensured this asset class is one of the more favourable for many investors.

Some investors are anticipating a rebound in the office market, but it remains demand remains subdued.

“For retail, investment remains robust, representing 21 per cent, with many larger centres changing hands, while a slow down has occurred across the smaller end of the market, with strips, stand alone and bulky good type assets all more difficult to shift. Until interest rates start to see some relief, this sector is expected to remain subdued.”