Climbing rents support challenging market

Commercial real estate remains resilient despite challenging economic conditions.

In its latest real estate quarterly review, diversified property group Dexus states that although office vacancy rates remain elevated, rents rose in the Sydney, Melbourne, Brisbane and Perth CBDs in the first quarter.

Peter Studley, Dexus head of research, says that in the Sydney CBD, small to medium firms have been active in the leasing market, however, some large consolidations in the financial services sector have offset the smaller expansions.

A trend towards centralisation, where suburban occupiers have taken CBD space, has supported demand.

Dexus reported office demand has been positive in the Melbourne, Brisbane and Perth markets over the past quarter, while Sydney saw a contraction.

Studley says while rising interest rate rises are making for challenging conditions, there are signs that they are close to peaking.

“Despite volatility in pricing across all asset classes, there are reasons for investors to maintain or increase exposure to real assets, which include a steady defensive income return and a significant diversification benefit,” he said.

Meanwhile, the industrial market continues to perform strongly, Dexus reported, with record low vacancy rates supporting significant rental growth. Key industrial markets have achieved between 20 per cent and 30 per cent rental growth in the past nine months.

While the retail sector is likely to face some headwinds through 2023, as interest rate increases and cost of living pressures begin to bite, positives include a decline in shopping centre vacancy rates and an increase in international migration, the report states.

After peaking in the second quarter of 2022 at 5.1 per cent, Sydney regional shopping centres saw vacancies decrease to 3.4 per cent in the final quarter.

“Visitor arrivals are on track to reach their pre-pandemic levels in the second half of 2023, contributing to increased foot traffic and retail sales, particularly in tourist-centric areas,” Studley said.