The sustained contraction of the global commercial real estate market has extended into the first quarter of 2024. Over the previous six months, the investment yield of commercial properties has weakened due to a decline of capital values, as investors look for higher returns to compensate for increased debt costs and perceived investment risk.
The KPMG Commercial Property Uncertainty Index has risen for all individual sectors, with the Office sector experiencing the most elevated level of uncertainty and the Industrial sector recording the largest increase in uncertainty over the past 6 months.
Key insights into Australia's commercial property market
The Office Sector
The office sector has been affected the most by a variety of factors: the shift to hybrid and remote work, uncertain business conditions with rising unemployment and higher implied capitalisation rates that have sent office values tumbling.
The Retail Sector
Investors are actively looking for defensive, income-producing investments in the sector; meaning prime retail properties have managed to record the lowest falls in total returns and led to a preference for non-discretionary/convenience-based retail properties.
The Industrial Sector
Despite total returns across all industrial properties falling over the past 12 months to March 2024, market sentiment suggests that the sector is bottoming out. While further minor adjustments may occur, the prevailing view is the most significant corrections are likely behind us.
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