Post pandemic new business boom may drive Australian office market’s recovery
Office markets nationwide underperform, but professional sectors like finance show promise for potential rebound. Image: Canva.
  • Surge in new businesses boosts commercial real estate, with regional variations.
  • Healthcare and industrial sectors attracting investors with stable income and growth.
  • Office and retail sectors face challenges amid remote work and e-commerce impact.

The post-COVID-19 era has seen a surge in new businesses, which may be welcome news for the commercial real estate market, according to Ray White’s head of research, Vanessa Rader.

Post-COVID-19 boom in new businesses

There were 406,365 new businesses registered through the 2022/23 financial year, bumping up the number of Australian businesses to 2,589,873 in total.

While most businesses resided in New South Wales, businesses only grew by 0.9% in this timespan. In fact, in Victoria, which has the second-highest number of businesses calling it home, the number of businesses shrank by 0.9%.

On the other hand, Queensland had the most growth, with new businesses increasing by 2.3%, while the Northern Territory trailed closely with 2.0%.

New Australian business starts by industry

New Australian business starts by industry
Source: Ray White, ABS.

Queensland’s success was primarily driven by its healthy population growth of late. The industries that flourished the most were the ones that catered to the needs of its evolving demographic.

Changing population demographics

Specifically, healthcare and social assistance businesses rose by 6.1% in 2022/23. This strong growth is in line with the strong demand for healthcare assets be it hospitals, medical centres and suites, and integrated facilities.

The top performing sector has been industrial, carried by the growth in transport, postal and warehousing activity. While the industrial markets have been plagued by low vacancy rates, with the demand for more distribution and storage assets not falling soon, the drop in manufacturing businesses may have freed up some assets.

While office markets have been underperforming nationwide generally, the robust numbers of new businesses sprouting in professional sectors like finance, insurance and real estate may see the office market return to form.

Total annual returns by asset type

Total annual returns by asset type
Source: Ray White, MSCI.

Investors remain keenly interested in the healthcare and industrial sectors, drawn by their long-term capital gain potential and ability to provide stable income. Additionally, the demand and supply gap within these assets will guarantee income stability for the foreseeable future. The 10-year annual total returns for industrial and healthcare stands at 14.2% and 13.8%, far outpacing their retail and office counterparts.

The future of offices is still uncertain

High vacancies in office assets will probably be the norm for some time, suppressing returns and investor interest until significant price corrections have been made.

Although the jump in new businesses in professional sectors is promising for the office sector, the post-pandemic rise and acceptance of working-from-home arrangements remain the most significant obstacles for this asset class.

The rise of e-commerce has also harmed retail assets, with fewer consumers shopping at brick-and-mortar retail stores. Though income returns have held steady in the retail sector, the uncertainty over the future of this asset class has depressed capital returns over the last ten years.

While the recent interest rate hikes have diminished investment activity, the healthcare and industrial sectors remain appealing options for investors still in the market. Supply in this market continues to be scant, while demand is high, driven by new and growing businesses and a rapidly shifting population.

These assets have achieved promising returns over the last year, with healthcare assets growing by 3.5% and industrial by 6.9%. Meanwhile, retail returns stayed positive at 2.8% due to its stable income, while office asset returns fell by 2.2%.

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