In the diagram below, the average growth rate of the commercial property price index over the ten years to 2022 is 7.65%. This period includes the lockdown periods where growth rates had declined, putting downward pressure on the index. One thing to note is that commercial property prices growth rates move in cycles. An expansionary phase can persist for some time until high price growth creates a construction boom, leading to oversupply. This transition was seen in the years 2006 and 2007 when average price growth was over 20%. The ensuing oversupply led to a contraction when in the years 2009 and 2010 prices contracted by an average of 10%. The cycle then turned to recovery where in the figure price growth averaged 5% between 2012 and 2015.
More recently the contraction phase was characterised by the decreasing use of office space and the increased rate of capital depreciation. Owners of the office property stock selling assets and making substantial write-downs of the property that they are retaining. The prime example is the loses in the Industry Superannuation Property Trust (ISPT) whose 50 Lonsdale Street Property Trust, which manages one of Melbourne’s leading office buildings, written down by 30% in the 2024 financial year (ioandc.com).
On the other hand, retail property seems to be in a recovery phase, and this is shown by recent purchases of large holdings. The retail sector is expected to face low supply, in the near term with development for 2024 and 2025 accounting for only one fifth of the 10-year average. Andrew Quillfeldt, Head of Capital Markets Research at Jones Lang Lasalle (JLL) stated that given the growth in population, it would be expected that up to 1.7 million square metres of retail space would be needed over the next four years, however there is currently only 521,000 square metres completed or under construction and due to come online over the next four years (2024-2027 inclusive) (www.jll.com.au).
Figure 1 Commercial Real Estate Prices for Australia (Source: FRED fred.stlouisfed.org)