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Sailing through the commercial property market challenges

CreditorWatch has released a comprehensive report titled ‘Navigating the stormy seas of the commercial property market,’ providing invaluable guidance to commercial landlords and investors to tackle market challenges and mitigate tenant insolvency risks.

This in-depth analysis delves into the complexities of the Australian commercial property market, examining risks across major asset classes like office, retail, and industrial sectors. The report features insights from industry experts, covering tax liabilities, industry insolvency risks, and strategies for minimizing the impact of insolvent tenants, such as rigorous tenant screening, extended lease terms, and diversifying the tenant mix.

This comprehensive guide offers insights into the current conditions of the Australian commercial property market and provides valuable advice for commercial landlords and investors, particularly in managing significant risks such as tenant insolvency.

The report outlines the risks associated within the commercial property market for key asset classes including the office, retail, and industrial sectors.

As set out in the report, asset classes within the Australian commercial property sector have experienced varied impacts due to the impacts of the COVID-19 pandemic and the shifting economic landscape. Stay-at-home restrictions have had lingering negative effects on office and retail sectors, whereas the industrial sector experienced boosted demand due to the online retail boom.

Key observations in the report include:

Office

The office sector, especially in Sydney and Melbourne CBDs, faces significant challenges due to increased vacancy rates caused by factors including new completed buildings and changing tenant needs. As remote work becomes more common, with many employees working from home on certain days, physical vacancy rates are higher than official data indicates. This lack of occupancy has broader implications for the commercial property market, affecting CBD retailers and hospitality outlets.

Retail

The retail sector, which had already been adapting to online retailing, was relatively well-prepared for the pandemic’s disruptions with shopping centre owners diversifying tenant types and embracing experiential retail. While online shopping surged during the pandemic, it has reverted to pre-COVID levels, and consumers have eagerly returned to physical stores. However, the current challenge in this sector is economic, with interest rate increases affecting consumer spending, particularly in the discretionary homewares sector. Australian consumers are still dining out consistently, but rising costs in labour, food, energy, and interest rates are posing a significant challenge for food and beverage operators.

Industrial

The industrial sector remains robust with strong demand despite a slowdown in online shopping. Rental growth, which initially outperformed other commercial property sectors due to high demand for warehousing and distribution centres during COVID-19, is now receding but still positive, making industrial property highly sought after by commercial property owners.

CreditorWatch’s CEO, Patrick Coghlan, says “Inflation is high and interest rates are 400bps higher in Australia than their historic lows during the pandemic. This is causing business conditions to be extremely challenging for many sectors, in particular food and beverage and construction.”

To help commercial landlords and investors overcome the complex commercial property environment, the report offers insights from industry experts such as CreditorWatch Chief Economist, Anneke Thompson, businessDEPOT Special Counsel, Brendan McGrath, and Jirsch Sutherland Managing Partner – Queensland, Chris Baskerville. They discuss the current state of tax liabilities and industry insolvency risks, as well as strategies to help minimise the impacts of an insolvent tenant, including thorough tenant screening, extensive lease terms, and diversifying tenant mix.

CreditorWatch’s ‘Navigating the stormy seas of the commercial property market’ Guide is now available in full here

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