Commercial property cycle offers opportunities for investors

Australia’s commercial property market offers diverse opportunities in retail, industrial, and office sectors, each influenced by its position in the property cycle.

The commercial property market in Australia presents diverse opportunities depending on the sector and where in the property cycle each sector currently sits. Property cycles are typically broken down into four phases: recovery, expansion, hyper-supply, and recession. Understanding these phases is essential for investors looking to make well-informed decisions.

The four phases of the commercial property cycle

According to property valuer and strategist Sam Tamblyn, each phase of the commercial property cycle offers unique opportunities for investors. Understanding these phases allows investors to align their strategies with the right timing in the market.

• Recovery: This phase occurs when property prices begin to rise from the bottom of the market trough. After a period of decline, values begin to stabilise, making it an opportune time for investors to purchase properties at discounted rates. Recovery is typically characterised by an increase in demand and an uptick in transaction volumes. Investors who can identify the start of this phase can benefit from acquiring assets before broader market recognition drives prices higher.

• Expansion: During the expansion phase, market conditions improve, and demand continues to rise. Vacancy rates fall, rents increase, and property development starts to become more attractive. This phase presents significant opportunities for developers to start new projects or for property owners to upgrade and renovate their properties to capitalise on improving market conditions.

• Hyper-supply: This phase follows expansion when an oversupply of properties leads to rising vacancy rates and downward pressure on prices. In the hyper-supply phase, many new developments are completed and come onto the market, saturating supply. Property owners may look to sell before market conditions worsen. Investors who wish to acquire properties should proceed with caution, as market values can start to decline.

• Recession: In this phase, vacancy rates rise further, demand weakens, and rents begin to fall. Many property owners may be forced to sell at discounted prices. Investors with cash or access to financing may find opportunities to purchase assets at reduced values, but they must be prepared for potential market volatility during this period.

Current trends in different commercial property sectors

Sam Tamblyn has provided insights into how different commercial property sectors are performing at present. Each sector is currently sitting in a different phase of the cycle, presenting different opportunities and risks for investors.

Office property sector

According to Tamblyn, the office property sector is still in the recessionary phase. Many large landlords are selling assets or writing down the value of their holdings. This decline in demand for office space is largely attributed to the rise of remote and hybrid work arrangements, which have reduced the need for large office footprints.

Although some investors may be tempted to buy office properties during this downturn, Tamblyn advises caution. While prices may appear attractive, the sector faces ongoing challenges, and there is no clear indication of a strong recovery in the near future. Investors need to be careful about acquiring office properties without thoroughly assessing long-term demand and vacancy risks.

Retail property sector

Tamblyn notes that the retail property sector is currently in the recovery phase. This is reflected in recent high-profile deals in Western Australia, where renewed investor confidence is driving transaction activity. Retail properties are seeing increased demand as consumer spending stabilises, and some retailers expand their presence in response to growing customer foot traffic post-pandemic.

This recovery phase presents opportunities for investors to acquire retail properties at a reasonable price before broader market gains push values higher. In particular, suburban retail centres and shopping strips may experience increased demand as consumers shift their shopping habits away from large shopping malls and towards more accessible retail hubs.

Industrial property sector

The industrial property sector shows mixed conditions depending on the region. In Sydney, the industrial property market remains in the expansion phase, with rents continuing to grow strongly. Demand for industrial space, particularly logistics and warehousing, is high due to the growth of e-commerce, supply chain reconfigurations, and the need for efficient storage and distribution facilities.

However, the supply of industrial properties is constrained by a lack of development opportunities in prime locations, driving up rental prices and making it difficult for businesses to secure adequate space. Investors with access to industrial properties in high-demand areas like Sydney are well-positioned to benefit from strong rental growth and limited competition.

In contrast, other regions may not be experiencing the same level of industrial property demand. Investors need to carefully assess the market dynamics in their target areas before committing to new purchases.

Opportunities and risks for investors

Understanding the property cycle and current trends within each sector is crucial for investors seeking to make informed decisions. Each phase of the cycle presents different opportunities:

• During the recovery phase, investors can often find properties at a discount before the market fully recognises the rebound in demand.

• In the expansion phase, rental growth and lower vacancy rates can create favourable conditions for development projects or property upgrades.

• The hyper-supply phase can offer opportunities to acquire properties at lower prices, but it requires careful analysis to avoid overpaying in a declining market.

• In the recession phase, distressed assets may present opportunities, but investors need to be mindful of long-term market dynamics and potential risks.

Timing is critical when making investment decisions, and investors must balance short-term opportunities with a long-term view of market fundamentals. Those who can navigate the property cycle effectively may find success in identifying undervalued assets or capitalising on rental growth in expanding markets.

Long-term trends shaping the commercial property market

Several long-term trends are expected to shape the future of the commercial property market:

• The rise of e-commerce: The continued growth of online retail is driving strong demand for logistics and warehousing facilities. As consumer behaviour shifts towards more online shopping, the industrial property sector is expected to see sustained demand, particularly in regions with strong transportation links and access to urban centres.

• Remote work and flexible office spaces: The shift to remote and hybrid working arrangements is reducing the demand for traditional office spaces. This trend may lead to more flexible office layouts, with an emphasis on shared spaces, hot-desking, and smaller footprints. Investors need to consider how these changes will impact long-term demand for office properties.

• Sustainability and green buildings: Increasingly, businesses are seeking properties that align with sustainability goals. Energy-efficient buildings and properties with green certifications are likely to see higher demand as companies look to reduce their environmental impact. Investors who can offer properties that meet these criteria may benefit from stronger tenant demand.

• Urbanisation and infrastructure investment: As cities continue to grow and governments invest in infrastructure projects, the demand for commercial properties in well-connected urban areas is likely to rise. Investors should focus on regions with strong transport links and access to major economic hubs, as these areas will attract businesses seeking prime locations.

Further questions

This is general information only and is subject to change at any given time. Your complete financial situation will need to be assessed before acceptance of any proposal or product.