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.

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

Has Australian commercial property bottomed?

Three opportunities in property in Australia and APAC

Steve Bennett on the latest trends driving commercial property

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 628 with weekend update

Australian investors have been pouring money into US stocks this year, just as they start to underperform the rest of the world. Is this a sign of things to come? This looks at 50 years of data to see what happens next.

  • 11 September 2025
Exchange traded products

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement

We need a better scheme to help superannuation victims

The Compensation Scheme of Last Resort fails families hit by First Guardian and Shield losses, as well as advisers who are being wrongly blamed for the saga. It’s time for a fair, faster, universal super levy solution.

Investment strategies

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Economy

How bread vs rice moulded history

Does a country's staple crop decide elements of its destiny? The second order effects of being a wheat or rice growing country could explain big differences in culture, societal norms and economic development.

Investment strategies

Small caps are catching fire - for good reason

Small caps just crashed the party like John McClane did in the movie, Die Hard - August delivered explosive gains. With valuations at historic lows, long-term investors could be set for a sequel worth watching.

Defensive growth for an age of deglobalisation, debt and disorder

Today’s new world order appears likely to lead to a lower return, higher risk investment environment. But this asset class looks especially well placed to survive, thrive, and deliver attractive returns to investors.

Economy

Will we choose a four-day working week?

The allure of a four-day week reflects a yearning for more balance in our lives. Yet the reliability of studies touting a lift in productivity is questionable and society may not be ready for such a shift anyway.

Sponsors

Alliances

© 2025 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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.