2020 and beyond looks positive for the world of commercial real estate according to Knight Frank. The leading independent global property consultancy forecasts rising capital values over the next 12 months coupled with the sixth consecutive year of double-digit returns, underpinned by economic confidence and a buoyant industrial sector fuelled by the e-commerce boom.
It will also be a good year for those who love experiencing new technology and what it can do for them: international consultancy Deloitte reports industry executives aim to increase their smart building portfolios in 2020, as satisfying tenant experience becomes a number one priority. The Deloitte Insights annual commercial real estate survey of almost 1000 leaders across 10 countries revealed more than 20% of decision makers now feel it is only a matter of time before smart buildings surpass location as the primary influencer of leasing decisions.
In Australia, significant yield compression will be a hallmark of the next two years, said Knight Frank’s chief economist Ben Burston. In Sydney alone, prime office property yields are forecast to decline 50 basis points to 4.1% based on the historic lagged relationship between bond yields and prime office yields. “As a result of a sharp downward shift in interest rates and the prospect of further RBA action we expect the investment market will drive to new highs in 2020, prolonging the property price cycle,” Mr Burston said.
Knight Frank associate director, research and consulting, Chris Naughtin is similarly bullish. “We expect capital growth of office property to pick up by 5.8% in 2020 and 6.4% in 2021 from an estimated 5.4% this year,” Mr Naughtin said.
Strong market conditions will see good fortune spread to all capital cities for the first time in five years, according to the Knight Frank report Predictions for 2020 and beyond. In the past, rental growth, capital growth and overall returns in the Sydney and Melbourne office and industrial markets have consistently outstripped those of Brisbane, Adelaide and Perth, but the foundation for a more even playing field has arrived.
“In 2020, we expect to see the start of a shift to a more even pattern of growth,” Mr Naughtin said. “The Brisbane, Perth and Adelaide office markets have each benefited from a sustained run of positive absorption which has lowered vacancy and exposed a shortage of prime stock even though overall vacancy remains elevated.”
The only market with a hiccup on the horizon is Melbourne’s office sector. The city’s vacancy rates will more than double thanks to the CBD soon being hit with the largest increase in supply since the early 1990s.
Although Melbourne has recently been enjoying historically low vacancy rates and Knight Frank analysts expect demand to continue, the quantity of space coming online is enormous.
“Melbourne office market conditions have been very tight for the past two years, as the market has benefited from a sustained run of high net absorption which has driven the vacancy rate to a low 3.3%,” Mr Naughtin said. “In 2020 and 2021 there will be around 590,000 sqm of supply to be delivered to the Melbourne’s CBD, with a big focus around the Docklands & Western core.
“This new supply will see the vacancy rates rise from historically low levels - and while strong tenant demand is expected to continue and the new schemes are substantially pre-committed, the sheer volume of new development set to be completed over the next few years will push the prime CBD office vacancy rate from 3.3% to 7.7% in 2021.”
If tenant interest in smart buildings is anything to go by however, it will be the most technologically advanced buildings that will be taken off the market first.
“The rapid adoption of smart buildings “is top of mind” for CRE executives that participated in the Deloitte Insights survey - and as a result most intend to increase their smart building portfolios, with Australia no exception.
The chief aim of such buildings filled with convenient, clever digital technology is capturing our waning attention spans, Deloitte observed, as it will likely become more difficult to attract and retain tenants as well as end users – the day-to-day users of a space whether they be retail shoppers, residents living in multifamily properties, employees working in office space or manufacturers using warehouses.
“The on-demand economy is reshaping tenant expectations about how real estate is consumed, and technology-enabled facilities and personalized experiences are already transforming the CRE industry,” Deloitte Insights reported.