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

10 little-known pension traps prove the value of advice

Most people entering retirement do not see a financial adviser, mainly due to cost. It's a major problem because there are small mistakes a retiree can make which are expensive and avoidable if a few tips were known.

Check eligibility for the Commonwealth Seniors Health Card

Eligibility for the Commonwealth Seniors Health Card has no asset test and a relatively high income test. It's worth checking eligibility and the benefits of qualifying to save on the cost of medications.

Hamish Douglass on why the movie hasn’t ended yet

The focus is on Magellan for its investment performance and departure of the CEO, but Douglass says the pandemic, inflation, rising rates and Middle East tensions have not played out. Vindication is always long term.

Start the year right with the 2022 Retiree Checklist

This is our annual checklist of what retirees need to be aware of in 2022. It is a long list of 25 items and not everything will apply to your situation. Run your eye over the benefits and entitlements.

At 98-years-old, Charlie Munger still delivers the one-liners

The Warren Buffett/Charlie Munger partnership is the stuff of legends, but even Charlie admits it is coming to an end ("I'm nearly dead"). He is one of the few people in investing prepared to say what he thinks.

Should I pay off the mortgage or top up my superannuation?

Depending on personal circumstances, it may be time to rethink the bias to paying down housing debt over wealth accumulation in super. Do the sums and ask these four questions to plan for your future.

Latest Updates

Investment strategies

Three ways index investing masks extra risk

There are thousands of different indexes, and they are not all diversified and broadly-based. Watch for concentration risk in sectors and companies, and know the underlying assets in case liquidity is needed.

Investment strategies

Will 2022 be the year for quality companies?

It is easy to feel like an investing genius over the last 10 years, with most asset classes making wonderful gains. But if there's a setback, companies like Reece, ARB, Cochlear, REA Group and CSL will recover best.

Shares

2022 outlook: buy a raincoat but don't put it on yet

In the 11th year of a bull market, near the end of the cycle, some type of correction is likely. Underneath is solid, healthy and underpinned by strong earnings growth, but there's less room for mistakes.

Gold

Time to give up on gold?

In 2021, the gold price failed to sustain its strong rise since 2018, although it recovered after early losses. But where does gold sit in a world of inflation, rising rates and a competitor like Bitcoin?

Investment strategies

Global leaders reveal surprises of 2021, challenges for 2022

In a sentence or two, global experts across many fields are asked to summarise the biggest surprise of 2021, and enduring challenges into 2022. It's a short and sweet view of the changes we are all facing.

Shares

What were the big stockmarket listings in record 2021?

In 2021, sharemarket gains supported record levels of capital raisings and IPOs in Australia. The range of deals listed here shows the maturity of the local market in providing equity capital.

Economy

Let 'er rip: how high can debt-to-GDP ratios soar?

Governments and investors have been complacent about the build up of debt, but at some level, a ceiling exists. Are we near yet? Trouble is brewing, especially in the eurozone and emerging countries.

Sponsors

Alliances

© 2022 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.