- CBRE predicts apartment rents could grow by 30% over 5 years across capital cities.
- Construction costs to fall 10-15% in 2023, with labour supply up and materials down.
- With rates stabilising in H1 2023, investors will be comfortable to increase deal flow.
Incredibly tight vacancy rates across residential and industrial property markets are likely to lead to a ‘rent-a-demic’ according to a new report.
After years of strong capital value hikes and relatively low-income growth, CBRE is forecasting the reverse in 2023 according to its Pacific Real Estate Market Outlook.
Head of Research, Pacific for CBRE, Sameer Chopra said lower levels of new supply, following surging construction costs, will help drive rental growth.
“We’ll see a reversion of history in 2023,” Mr Chopra said.
“We expect weaker values and strong rent growth, with tight vacancy rates likely to lead to a ‘rent-a-demic’ in the industrial and residential markets.”
Unit rents to increase
According to CBRE, apartment rents could grow by 30 per cent over five years across the major capital city markets due to tight vacancy, with 2023 residential apartment construction likely to be around 45 per cent below the 2017 peak.
Eastern Seaboard cities are tipped to experience rental growth of 4-6 per cent per annum, with growth of 6-7 per cent per annum on the West Coast, given the significant mismatch between demand and supply for inner-city apartments.
In the industrial & logistics sector, constrained levels of supply and a country-wide vacancy rate of 0.6 per cent – the lowest I&L vacancy rate globally – will help fuel high single-digit rental growth in most Australian markets in 2023, with 58 per cent of the 2023 I&L development pipeline already pre-committed.
Changing dynamics
CBRE is forecasting construction costs to fall by 10-15 per cent in 2023 as labour becomes more readily available and as raw material costs fall. This will help get development projects to get off the ground in the industrial and residential sectors.
In 2020 and 2021 there was a surge in Australians taking advantage of sea change and tree change opportunities, which drove down regional residential vacancies and led to price growth that outperformed city markets.
2022 also saw the beginning of a reversal of the sea and tree change trend, as inner-city vacancies fell by 1.8 per cent, while sea change vacancies increased by 0.3 per cent.
Mr Chopra said, “Inner city and CBD locations are benefiting from a confluence of returning workers, international students, tourists and consumers craving buzz, as well as a growing desire by residents and workers for shorter commutes and greater in-person interaction.”
The shift to premium office space
According to the report, nearly three-quarters of the office re-location decisions in major city CBDs over the past two years have involved premises which commanded higher market rents.
For these re-locations, the median net face rent is 9.5 per cent higher ($/sqm), compared to what may have been payable if the occupier had remained in the same premises.
CBRE’s Head of Office Research, Australia, Tom Broderick, said rent isn’t the main factor for many businesses at the moment.
Mr Broderick said, “While rent is important, our data suggests other factors are taking precedence in occupier decisions.
“This theme should be supportive of new builds and re-developments.”
Investment Activity
CBRE is forecasting that the slowdown in real estate investment activity which began in the second half of 2022 will continue this year, with a mid-single-digit decline in transaction volumes for 2023, before a 20 per cent rebound in 2024.
While the cost of funding has challenged deal flow, activity is expected to pick up as interest rates stabilise.
Mr Broderick said, “With gearing in the commercial real estate industry below 30 per cent, forced selling is unlikely with sellers instead likely to be motivated by needing funds for robust development pipelines.
“The current slowdown in sales activity is largely due to a lack of consensus on pricing between vendors and buyers.
“With rates likely to stabilise in H1 2023, investors will have more comfort around the cost of debt, which should mean deal flow will increase towards the end of the year,” he said.
