By Guest Blogger, Pete Wargent,
Next Level Wealth - www.gonextlevelwealth.com.au
Disruption in the commercial space
2020 has been a hugely disruptive year in many respects, and although policymakers and the government have stepped in with some massive stimulus measures, not all sectors of the economy can be insulated from the fallout of the pandemic.
While residential property has generally been very well supported by lower interest rates and mortgage holidays, there may be some significant implications for commercial property.
Some banks have become extra-cautious about lending to sectors that have been directly impacted by the pandemic, such as tourism, retail, and other commercial property, as well as to new business customers.
In particular, the various restrictions may see some vulnerable office and retail property take a substantial hit to valuations.
There will in turn likely be some severe challenges for heavily leveraged developers and investors in the space.
The timing of the pandemic was unfortunate, since both Sydney and Melbourne have seen a large pipeline of investment in newly constructed office space, much of which was due to hit the market this year.
Vacancies and lower rents
The demand for city office space is now well down, however, so vacancy rates have begun to rise (albeit from low starting levels in Sydney and Melbourne) and office rents must surely decline further from here.
For office commercial property this has implications for valuations, which will likely fall in 2021, especially in secondary grade buildings.
Social distancing restrictions have also had adverse implications for retail capacity and space, and this sector has is coming under severe pressure, despite the rise in headline retail turnover.
Industrial property was faring relatively well prior to the pandemic, and e-commerce has continued to perform well this year.
The quest for yield
Loan payment deferrals offered by banks - plus flexibility on rental payments for commercial tenants that have been significantly affected by the virus – have generally been effective in stemming the worst to date.
But the downturn has yet to play out in full, as loan deferrals and discounts by residential and commercial landlords flow through.
While the top end of the commercial market looks set to experience some pain, record low interest rates could arguably see the lower end of the market catch a bid as the quest for yield intensifies.
Life after the vaccine
Recently there’s been a spate of positive news suggesting that a vaccine may be made available over the coming months.
But when will people return to the office in the CBD?
It seems likely that life will be more similar than different post-COVID – largely because migrants tend to head to the capital cities - but it will take time for dynamics to normalise, with border restrictions likely persisting until well into 2021.
However, it seems likely that a ‘new normal’ could involve a lower level of demand for permanent office space, as virtual meetings and working from home trends stick around.
A new hybrid model of some time in office and some from home seems to be a feasible outcome.
Overall, the residential markets have held up strongly this year, but there’s probably some pain in the post for office and retail properties.
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