The hits and misses for commercial property in 2021

COVID-19 changed the way we do commercial property, potentially forever says to Steve Palise, commercial property expert and author.

It’s no secret that there was panic for the first six months of COVID-19.

Some investors delayed purchases until there was some clarity on the timeline and stability with border restrictions.

CBD’s became ghost-towns, retail, fitness and hospitality had forced closures, intermittent closures, or controlled occupancy levels and office workers began working from home.

Melbourne’s office occupancy hit seven per cent of what it was prior to COVID-19.

During the Melbourne lockdown, many investors remained quiet out of fear, while those in other capital cities looked for opportunity whilst they were able to freely roam around their state.

The commercial sector tenants required a shift from identifying opportunity to survival and managing risks, but now, a forward-thinking plan for business success is required to survive in the new commercial world.

Towards the end of 2020 with almost zero COVID-19 cases, market confidence returned with an increase in sales over the last quarter; so what can we expect for the commercial sector in 2021?

Many investors are shifting their residential focus to commercial

With a focus on income security, low residential yields will push investors to look into the commercial sector for ‘guaranteed’ returns.

It’s likely overseas buyers will increase their share of purchases as well, especially given the looming Presidency of Joe Biden, which will likely mend foreign relationships across the board.

Suburban retail will remain in demand

On the other hand, in line with popular opinion, CBD retail will struggle well into 2021.

Retailers must meet the demand for an increase in online shopping as well as ease for item return procedures.

Suburban retail will continue to thrive due to the increased resident proximity which has been escalated by the numerous work from home models many businesses have adapted.

This will grow and see an increase in rents as more employees work from home and utilise their local locations and facilities.

Look for suburban office space that has lifestyle potential such as outdoor areas, recreation centres and lots of natural light.

I would like to see new high density residential buildings include features for working from home such as small home offices, or even co-working spaces in the building.

The office sector will also need a total revamp in 2021

The back end of 2020 saw an increased focus on employee mental and physical wellbeing and this will certainly be critical for 2021.

The employee experience needs to be at the forefront – think break out zones, outdoor spaces and wellness facilities. Office locations will need to be an enjoyable and offer a social experience to entice workers back.

Office culture, collaboration and cohesion is a must for commercial office space in 2021 if they seek to survive.

With high vacancy rates and an increased amount of choice, large office businesses will move away from the CBD to cheaper options.

The Australian government has played an important role in Australia’s effective response to COVID-19. With a push for economic recovery, there should a plethora of new infrastructure projects.

This will further increase the demand of the industrial sector combined with increasing e-commerce and distribution.

The industrial sector in some regions performed very well through 2020

This sector will certainly experience unprecedented demand in 2021, in particular regional industrial facilities and also suburban retail and office space.

Mail to parcel ratios reduced from 4:1 in 2015 to 2:1 in 2020. It is predicted that by 2025 this ratio will be 1:1 (source CBRE).

Supply chains will need to evolve to meet the changing demand of E-commerce. The improvement of fast local delivery will aid an increase in demand and growth for regional industrial facilities.

There is a huge pressure for industrial land availability which will increase yields and growth. In low commercial vacancy rate regions, there will be a need for multi-storey warehousing and industrial floor space.

We’ve seen it in residential and this is no different for commercial, there will be an increased demand for lifestyle friendly commercial real estate. Lifestyle regional commercial space will increase with increased population growth and intercity migration.

In conclusion

Unfortunately, the whole commercial space will not excel in 2021.

Even with a slow return to work, offices will remain to struggle. This will mean CBD retail will also struggle, as well as international hotels.

I believe Brisbane, Adelaide, and Canberra will be the best performing locations as a whole due to their strong yields and low vacancy rates, while Sydney and Melbourne office space will be the worst performers.

Here are my key 2021 hits and misses:

2021 hits

  • Industrial sector and industrial land
  • Lifestyle region commercial spaces
  • Suburban retail and suburban office space
  • Brisbane, Adelaide, and Canberra to be best performing locations as a whole due to strong yields and low vacancy rates

2021 misses

  • CBD Office Space – especially in Sydney and Melbourne
  • CBD Retail
  • International Hotels

Steve Palise is a commercial property expert at Suburbanite, an author and a licensed real estate agent.

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