What’s hot and what’s not in commercial property

For as long as I can remember, strip retail and shopping centres have been one of the most desirable property types for investors.

This has changed dramatically over the past two years as lacklustre retail trade figures and the growth of online have cut into the outlook for rental returns. The other commercial property type to take a dive in popularity has been development sites.

While record prices have been set in many markets recently, a drop in offshore developers and fewer investors in the market has resulted in a drop in demand for these sites. What, then, are the commercial types worth having a look at now?

Office tenants are back

Office yields have been trending down for some time now and while prices for office buildings and suites have continued to rise, the lack of tenants has previously been an issue.

This has now turned, and the outlook for rental growth is positive in many markets – even those that have had very high vacancy rates such as Perth and Brisbane.

Office space has made a comeback in the commercial property sector. Picture: Getty

Which property type will benefit most from technological change?

Online retailing needs it, future farming needs it and eventually driverless cars will need a lot of it. Industrial is the main beneficiary from technological change.

While many of these are long-term structural changes to industrial property demand, right now employment growth across Australia is making this a highly sought after property type.

It isn’t just large warehouses in outer metro areas, we’re also seeing an increase in demand for smaller properties in inner suburban areas.

Airbnb is here but hotels are still popular

Airbnb has been a major disruptor across the world. It’s therefore perhaps a bit surprising to see that hotels are still high in demand. Australia is seeing strong growth in tourism numbers, particularly from China where 1.3 million visitors arrived over the past 12 months.

While Chinese tourist growth is particularly strong, tourists from India, the US and Canada have also seen strong increases.

Look to top tourist destinations to see where demand is strongest – from perennial favourites such as the Gold Coast to emerging hot spots such as Hobart and Adelaide.

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Hotels are still in vogue as tourism numbers rise. Picture: Getty

Should you turn your back on retail and development sites?

While the sentiment towards retail property has turned, not all retail is doing badly and some areas are doing particularly well.

Chapel Street in South Yarra may be struggling to attract tenants however up the road in Windsor, a strong restaurant precinct has developed. Similarly, shopping centres with strong catchments continue to thrive. While more of us shop online, not all shopping will be done online.

For development sites, the key now is to pick areas where demand for apartments is strongest. While investors have staged a retreat, first home buyers have increased across all capital cities over the past 12 months.

In many capital cities, first home buyers receive favourable grants if they buy a new property – whether that is a house or an apartment. Places like Geelong, where apartments typically did not see strong demand, have seen a jump in search activity on realestate.com.au.

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Have you missed the boat?

With capital growth evaporating in Sydney and Melbourne residential markets, many investors are looking more closely at commercial property, attracted by higher yields and in some cases, greater opportunity for capital growth.

Right now, the demand for commercial property remains strong and we are not seeing the slowdown so evident in residential.

It is however getting expensive and doing your research to understand the best markets to buy, as well as the tenant profile of the building, is more important than ever.