Traditional real estate asset classes will be impacted to varying degrees by mid-2023 when the market adapts to a pricing reset.
Two-tiered markets which emerged this year will continue to be accentuated in 2023, favouring Premium and A Grade office assets, strong performing retail in prime catchment areas and short WALE industrial stock, according to Colliers’ Managing Director of Valuation & Advisory Services Dwight Hillier.
“While the flight to quality divides the office and retail markets, industrial investor preferences will see sharper pricing occurring for assets with shorter lease expiry profiles, which enable imminent rental growth upside.” Mr Hillier said.
The weighted average national industrial prime rent (net face) grew by 21.7% in 2022, which was six times the 10-year average of 3.6% per annum, according to Colliers’ research. Rents are also expected to increase by another 6.0-8.0% in 2023, due to the supply and demand imbalance persisting over the short to medium term.
“The softening of yields to date has outpaced rental growth, and industrial prime capital values have fallen on average by 6.2% nationally since the peak in pricing in Q1 2022.” Mr Hillier said.
Around a 7% increase in rents will be required to preserve industrial asset values for every 25 basis points that yields soften. Colliers’ current analysis predicts yields will soften a further ~50 basis points by mid-2023 and then stabilise thereafter, taking the national prime yield to just over 5.25%.
“While industrial has been heralded as the golden child this year, the office sector proved most controversial as it became clear that emphasis on ‘return to office’ and occupancy numbers were outdated predictors of demand.” Mr Hillier said.
“The value of office space has evolved post pandemic to emphasise employee experience over headcount to space ratios.”
The national weighted average capital value for office peaked in June 2022 – the start of the expected 12-18 month market cycle until relative stability by the end of 2023, according to Colliers’ analysis.
“The opportunity presented by Premium and A Grade office assets will increase at the end of next year as investor appetite grows in alignment with occupier preferences post pandemic, ensuring yields remain resilient.” Mr Hillier said.
The CBD national office weighted yield will soften by around 45 basis points for premium grade, around 100 basis points for A Grade and over 150 basis points for B Grade assets from the market peak of June 2022 until the trough of December 2023, according to Colliers’ analysis.
Reduced capital values over this period will also highlight quality assets, with the average CBD capital values of premium and A Grade to only decline by around 5% and 12%, respectively. While B Grade values may drop by up to 20%.
“We can also see it’s likely that capital values for Premium and A Grade stock will exceed pre pandemic numbers across 2024 and 2025, while B Grade landlords will benefit from repositioning assets.” Mr Hillier said.
“As another sector which suffered from lockdown restrictions, retail adapted quickly and was the first to reprice.
“Average retail yields are remaining broadly stable until the end of this year, and assets that expanded their role as essential community infrastructure have taken the lead on recovery.”
To capitalise on localised shopping habits of consumers, landlords in regional malls are now dedicating up to 40% of Gross Lettable Area (GLA) for an experienced based retail offering, and the increasing prevalence of childcare and other new features in these centres indicates the future of retail’s enhanced community role.
“Moving forward, quality retail assets considered community pillars in prime catchment areas should remain highly valued with income growth offsetting any value erosion from shifting market dynamics.” Mr Hillier said.
“With big capital eyeing the prospects of Asia Pacific markets over the US and Europe for growth next year, the flight to quality will shift from being a trend to being a key driver for evolution in the retail and office sector, while the industrial sector will seek to leverage rents to safeguard capital values.”