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Prices Up Yields Down – An on the ground snapshot into commercial property

Gone are the days commercial property was reserved for a few highly skilled investors. It is now in extremely high demand across most of the capitals and not just Sydney and Melbourne.

According to Anna Porter, Suburbanite Principal, valuer and market commentator, commercial property has been a whirlwind with an ever-changing accessibility landscape and increased buy-in difficulty.

“We are seeing far greater demand than there is supply for commercial property, which is driving pricing up but unfortunately, on the ground, the rents aren’t keeping at pace with the pricing movement, so yields are retracting,” Porter shares.

“The increase in buyers is actually chasing prices up while they are chasing yields down – that’s the relationship between the two.”

Porter reveals it is difficult to secure a good commercial property as good quality commercial properties are selling within days of hitting the market.

So, what type of commercial property should buyers be looking for?

“Commercial is actually a broad term and there’s different types of commercial assets,” she says.

“When we look at the types of commercial property that are lacking in supply but high in demand, we’re talking about commercial and industrial warehouse style, bulky goods and medical style properties,”

“These types of commercial assets are performing really well and there is not prediction of their performance retracting.”

The continuous push for half weeks and working from home style arrangements, is continuing to impact the office and retail sector.

“For the office and retail sector, especially the inner-city locations, performance is poor because there is still a lack of people coming back into the cities, their behaviours have changed and a lot of big organisations are collapsing their space,” says Porter.

“It’s also common now for organisations to put clauses into their lease where they can go from 3 or 4 floors to 1 at any time during their rental agreement without being penalised.”

Big companies are thinking ahead in terms of their workforce and tenants have more power than ever before in these types of situations.

“Tenants have taken the power back which we saw during the pandemic through the renegotiation of leases where legislative movements by the government shifted the power to tenants,” Ms Porter reveals.

“The market is in fact still recovering from this and it appears to be hanging around in this sector.”

The good news for these asset classes in that suburban retail and office space is still thriving.

“Suburban retail shops are more valuable than ever especially as more people take advantage of their local as they continue to work from home,” reveals Porter.

“The value however comes through the low vacancy rates which pushes up the rent in line with the higher demand – if businesses are thriving more businesses want to go in and in turn will pay more rent,”

“It’s important to keep in mind though that rent when you are in a commercial space doesn’t go up instantly as tenants will be locked into a one-to-two-year lease, so it takes a little while for that to filter through and come out the other end,”

“It is through the increase in yields which has a real effect on values, but this is certainly where things are heading.”

The other asset class that has performed well is co-working spaces which are in high demand so there are some sectors that have really had a positive outcome from this suburban change.

If you are interested in investing in commercial property, our friendly commercial team would love to assist you on your journey. Please contact our team on 1300 245 490.