Move to quality office space offers hope for commercial sector – ANZ

Big bank finds a solid pipeline of development despite work-from-home trends

Move to quality office space offers hope for commercial sector – ANZ

The commercial property sector is finding hope in a "flight to quality" trend, according to analysis from ANZ.

The impact of hybrid working models and online alternatives to in-person business events and meetings has weakened the relationship between employment growth, office use, and central business district retail and hotel use, The Australian reported.

While the development pipeline for hotels and retail has been sluggish, ANZ analysts have noted that strong growth in office-based employment and the flight to quality have resulted in a solid medium-term pipeline of development, despite persistent work-from-home trends, according to The Australian. The value of new office building approvals continues to surpass pre-pandemic levels, indicating resilience in the office construction pipeline.

Adelaide Timbrell (pictured above), senior economist at ANZ, highlighted that the office construction pipeline has defied the structural shift towards remote work.

“The value of new office building approvals also continues to be well above pre-pandemic levels,” Timbrell told The Australian. “The risks to office valuations and office demand may limit how many projects start construction in the short to medium term.”

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In the 2023 financial year, office construction activity for projects over $100 million increased by 12.7 percent. The potential investment pipeline for the office sector is expected to peak above pre-pandemic levels in 2025. Offices have benefited from the growth in office-related employment and the increase in return-to-work mandates, with midweek attendance reaching 80% of pre-COVID levels.

Rising costs

Despite the positive trends in office construction, office rents have declined by 13% since 2019, and building and funding costs have risen rapidly, The Australian reported. In the broader commercial property space, higher funding costs and labour shortages have increased the risk or reduced the feasibility of some projects.

The crowding out of investment from the public sector and renewable energy infrastructure may also limit the feasibility of certain commercial building projects in the longer term.

Hotel and retail sectors

The hotel sector has yet to surpass pre-pandemic numbers in terms of approvals, as domestic visitor nights remain 3.5% below 2019 levels. The rise of alternative short-term accommodation options and the impacts of global central bank tightening on consumption pose challenges to hotel demand, according to The Australian.

In the retail sector, subdued consumer spending has reduced the value of building approvals in the past year. Inflation and higher interest rates have restrained household consumption, leading to spending shifting towards other goods and services.

However, relief is expected in the second half of 2024 as lower inflation, rate cuts, tax cuts, and potential fiscal easing improve household incomes and contribute to increased retail demand, The Australian reported.

ANZ's analysis also found that mixed-use developments and redevelopments continue to dominate the retail sector's construction landscape. The need for a cohesive retail experience limits the range of possible buildings.

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