Low unemployment key driver of commercial real estate security – Real Estate Business
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Mathew Tiller, LJ Hooker Group’s head of research, has offered his predictions for the sector’s future.
In what he describes as a challenging market, accentuated by rising interest rates and living costs and supply chain issues,
He believes the 3.5 per cent unemployment rate reported by the Australian Bureau of Statistics for June — the lowest in almost 50 years — is a key factor making commercial real estate ripe for investors.
This number is a major decline on the 7.5 per cent reported at the pandemic’s peak and paired with underemployment sitting at 5.7 per cent in May, means that 385,800 more people are employed now than in May 2021, highlighting the strength of Australia’s post-pandemic economic recovery.
“Commercial real estate has been a beneficiary of improved employment figures,” Mr Tiller affirmed.
“For retail property owners, greater job security and the end to COVID-19 lockdowns has supported the recovery in spending. The ability for people to shop, dine, and travel without restrictions has assisted leasing and re-leasing of small suburban shops and through to larger regional shopping centres.”
Moreover, the return to the office — highlighted by office occupancy rates falling amidst employers pushing for the increased productivity that arises from working with a centralised location — is another factor that entices investors to the commercial sector, as more employed people result in more uptake of office space.
On the flip side, tight labour markets have increased the difficulty for businesses to hire new employees and match the additional demand. Moreover, the additional household spending has placed upward pressure on inflation, which the RBA has consistently been curbing with cash rate rises since May.
Furthermore, the reopening of international borders has spurred population growth, subsequently benefiting student accommodation, as well as hotels, resorts, and leisure assets, further boosting the commercial sector.
Despite the positivity in the air, Mr Tiller did address the fact that challenges will remain for the sector — with inflation remaining the most pertinent threat as central banks globally “aggressively increase interest rates and tighten their monetary policy positions”.
“This has had a knock-on effect to government bonds which have seen yields rise considerably since the beginnings of this tightening cycle. This is important: large institutional investors use government bonds as a benchmark when investing in commercial real estate assets, and the strong growth in government bonds yields may reduce demand from these investors.”
Mr Tiller outlined that “retail rents remain flat but some sought-after areas are improving. Neighbourhood shopping centres and other suburban retailers have benefited from the ‘work from home’ movement and vacancies in these areas tightened.”
He concluded that “office rents have yet to see any major change but rising occupancy levels are expected to see this shift over the course of the next 12-months”.
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