Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 419

Economic recovery and its impact on commercial real estate

The pandemic is far from over, as the current lockdowns across the country attest. However, the recession that it caused, for now, is behind us. When it first unfolded, economists hypothesised how this recession may differ from others. The results are in, and for Australia at least, the pandemic-led recession was characterised by the magnitude of the downturn and the speed of the recovery. The initial downturn was sharp due to the introduction of wide-ranging restrictions (including movement of people) and the recovery was fast because governments moved swiftly to implement record levels of stimulus and the economy was not burdened by the hangover of a financial crisis.

Government stimulus has joined low interest rates and easing restrictions to fuel a rapid recovery in Australia and around the world. The global economy’s pace of expansion is accelerating. According to the latest World Bank forecasts (June 2021 Global Economic Prospects), the global economy is set for the fastest recovery from recession in over 80 years. Australia’s economic performance has also been impressive. Since mid-2020 the economy has had three of the strongest consecutive quarters of economic growth on record and a sharply falling unemployment rate, which is now at one of its lowest levels since 2008.

What does this mean for real estate?

There are both short and long-term consequences for real estate. However, the themes depend on the individual property sectors.

Industrial and logistics

Globally, capital demand for quality industrial property has driven the strongest period of growth the industrial and logistics sector has experienced in recent years, with leasing and transaction volumes at record levels.

Industrial & logistics sector real estate demand accelerated dramatically during the pandemic. Lockdowns drove Australians online for their daily requirements and substituted consumption which would have been spent on other activities, like travel. As a result, several years of online retailing growth was condensed within one year.

The sector is still adapting to this demand, with both leasing volumes and investment pricing reaching record levels. Additionally, certain businesses and tenants have begun to switch from ‘just-in-time’ to ‘just-in-case’ inventory strategies for improved resiliency. Some estimates expect typical inventories will increase 5-10% over the next two to three years. This provides positive flow-on effects to leasing demand as a result of increased space requirements.

Retail

Demand for convenience retail assets with long-Weighted Average Lease Expiries (WALE) has continued to be strong, especially if the asset is underpinned by a blue-chip tenant covenant and the essential nature of the use.

As the growth across the industrial sector has highlighted, this recession did not impact consumer demand for goods. The recent Australian Bureau of Statistics retail trade results remained ahead of expectations and retail sales have remained well above pre-pandemic levels both in aggregate and across nearly all categories. This demand has had varying impacts on retail real estate.

The grocery anchored (i.e. Coles, Woolworths and Aldi) and convenience retail sector has performed well over the year and is expected to continue to do so. However, the larger discretionary retail centres have been challenged by mandated social distancing and travel restrictions for both tourists and international students. While the larger centres will continue to evolve and remain relevant, other centres may not fare so well.

In contrast, household consumption over the past year has surged, particularly benefiting real estate leased to hardware stores and other large format retail tenants.

Office

Investment sentiment is improving and has been evidenced by several office properties trading at firm capitalisation (cap) rates (elevated prices), particularly for long WALE assets with secure income streams.

The movements in office vacancies have broadly reflected the economy’s trajectory. The world has watched Australia’s office re-entry closely as our comparatively lower COVID-19 numbers enabled the earlier re-opening of cities, although there is a setback in the current lockdowns. Mobility statistics suggest that office occupancies trace the easing of mandated restrictions, and although this may change over time, there is limited immediate evidence of reduced office demand from remote working strategies.

In many ways the past year was a forced experiment which increased the acceptance of remote working flexibility while simultaneously raising awareness around the purpose of an office. It highlighted the contributions an office has on knowledge, information flow, innovation, productivity, risk management and collaboration.

Quality offices provide environments which contribute to lower absenteeism, lower staff turnover, and better organisational performance.


Register here to receive the Firstlinks weekly newsletter for free

This sentiment has been shared by a growing chorus of business leaders who have emphasised the importance of informal interactions, access to leaders, business hubs and the storage and transmission mechanisms of social capital.

The cost-benefit of offices will continue to be weighed up by corporates: office costs can be approximately 10% of salary costs yet the boost to productivity with the collaboration and culture-building benefit an office brings can be significantly greater. As such, we believe the office market is likely to see more polarised demand between lower and higher quality office properties.

Most businesses and employees believe there will be increased flexibility in the post-pandemic era. However, increased flexibility does not necessarily translate into materially lower office demand. The balance of required space will ultimately be influenced by the flexibility offered to staff and the de-densification. Over many years, businesses have placed more employees into smaller spaces but the pandemic is expected to halt or even reverse this trend.

According to a recently-released JLL Benchmarking Cities and Real Estate Report, pressures to de-densify will likely occur as office design evolves to support productivity, wellbeing and experience alike, and as organisations allocate more square meterage to collaboration and amenities in order to attract and retain high-quality talent.

Office occupational densities vs. occupational costs

Source: JLL Research, Charter Hall Research

We expect the economic recovery to continue, despite some inevitable short-term volatility as the pandemic recedes. The current lockdowns highlight the difficulty in making short-term economic predictions. However, it is the medium to long-term outlook that Charter Hall focuses on for investors and we continue to hold the view that the outlook for the Australian real estate sectors where we invest remains strong.

 

Steve Bennett is CEO of Charter Hall's Direct Property business. Charter Hall is a sponsor of Firstlinks. This article is for general information purposes only and does not consider the circumstances of any person, and investors should take professional investment advice before acting.

For more articles and papers from Charter Hall, please click here.

 

RELATED ARTICLES

The looming excess of housing and why prices will fall

Sale and leasebacks benefit both companies and investors

banner

Most viewed in recent weeks

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

Latest Updates

Investment strategies

Are these the four most-costly words in investing?

A surprisingly high percentage of respondents believe 'This Time is Different'. They may be in for a tough time if history repeats as we have seen plenty of asset bubbles before. Do we have new rules for investing?

Investment strategies

100 tips from our readers for new investors

From the hundreds of survey responses, here is a selection of 100 tips, with others to come next week. There are consistent and new themes based on decades of experience making mistakes and enjoying successes.

Strategy

What should the next generation's Australia look like?

An unwanted fiscal drain will fall on generations of Australians who have seen their incomes and wealth stagnate, having missed the property boom and entered the workforce during a period of flatlining real wages.

Shares

Bank results scorecard and the gold star awards

The forecasts were wrong. In COVID, banks were expected to face falling house prices, high unemployment and a lending downturn. In the recovery, which banks are awarded gold stars based on the better performance?

Exchange traded products

In the beginning, there were LICs. Where are they now?

While the competing structure, ETFs, has increased in size far quicker in recent years, LICs remain an important part of the listed trust sector. There are differences between Traditional and Trading LICs.

Shares

Should you bank on the Westpac buy-back?

Westpac has sent out details of its buy-back and readers have asked for an explanation. It is not beneficial for all investors and whether this one works for some depends on where the bank sets the final price.

Investment strategies

Understanding the benefits of rebalancing

Whether they know it or not, most investors use of version of a Strategic Asset Allocation (SAA) to create an efficient portfolio mix of different asset classes, but the benefits of rebalancing are often overlooked.

Shares

Six stocks positioned well for a solid but volatile recovery

The rotation to economic recovery favouring value stocks continues but risks loom on the horizon. What lessons can be drawn from reporting season and what are the trends as inflation appears in parts of business?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.