No Immediate Reprieve: The Path Ahead for Commercial Property Markets
As we step into 2025, the Australian commercial property market finds itself at a critical juncture, with Victoria at the heart of some of the toughest challenges. The optimism that buoyed the industry in late 2024—fuelled by hopes of imminent interest rate cuts—has faded. Instead, we now face a reality where such cuts appear to be even further away than anticipated, leaving many industry participants questioning the road ahead.
A Delayed Recovery: Interest Rate Cuts Won’t Be Enough
2024 saw many commercial property stakeholders pinning their hopes on a reduction in the official cash rate to revive confidence and stimulate activity. However, the anticipated rate cuts didn’t materialize, and with inflationary pressures still lingering, monetary easing seems unlikely in the near term.
This sobering reality is a reminder that for many sectors—especially those governed by traditional fundamental drivers—interest rate cuts alone will not be sufficient to restore confidence. A more holistic approach is required, addressing deeper structural challenges to correct market conditions, rekindle buyer demand, and stabilize asset pricing.
Victoria’s Financial Position: A Barrier to Progress
Victoria’s commercial property market faces unique hurdles. The state’s financial position, characterized by significant debt levels, poses a formidable challenge to progress. While innovative ideas and bold plans emerge from various quarters, they remain just that—ideas—without the financial backing to bring them to life.
Equally concerning is the erosion of trust between the property industry and political leadership. For the market to recover and thrive, a cooperative relationship between the industry and policymakers is paramount. Unfortunately, the widening trust deficit undermines the ability to navigate these challenging times effectively.
Retail Resilience: A Beacon of Hope
Amidst the broader struggles, the retail investment sector has been a standout performer in 2024. For years, retail faced scepticism due to fears around the rise of online shopping, but it has once again proven its resilience. With consistent consumer demand and population growth driving foot traffic, retail continues to demonstrate why it has been the most dependable commercial property sector over decades.
This resilience positions retail investment for continued growth, with suburban and regional areas seeing robust activity. The sector’s enduring strength underscores its critical role in stabilizing the broader commercial property market.
The Office Conundrum: A Long Road Ahead
Conversely, the commercial office sector remains mired in challenges. Both suburban and CBD office buildings are grappling with persistently high vacancy rates, compounded by the widespread adoption of hybrid work models.
Efforts by some companies to mandate a return to office face resistance, as flexible work has become a non-negotiable factor for many employees. This dynamic creates a ripple effect, making it difficult for employers to enforce in-office policies without risking staff turnover. For the office market to recover, it will require not only structural changes but also a shift in societal attitudes toward the workplace.
Industrial and Data Centres: Anchors of Strength
Amid the challenges, the industrial and data centre sectors continue to shine. Driven by the sustained growth of e-commerce and the increasing demand for digital infrastructure, these sectors are performing exceptionally well.
Industrial properties, in particular, are benefiting from robust leasing activity, while data centres are capitalizing on Australia’s expanding digital economy. These sectors will remain crucial pillars for the commercial property market, providing stability and growth in uncertain times.
PBSA and BTR: Emerging Opportunities with Government Backing
Purpose-Built Student Accommodation (PBSA) and Build-to-Rent (BTR) developments are emerging as key opportunities. Both sectors have gained critical government support, positioning them to thrive. PBSA aligns with the strategic goal of attracting international students—a vital component of state economies—while BTR addresses pressing housing affordability and supply issues.
However, BTR is not a panacea for the housing crisis. While it plays an important role, the broader housing supply landscape requires urgent attention.
A Call to Action: Addressing the Housing Supply Crisis
Australia’s housing supply shortfall is a growing concern, with dire implications for affordability and accessibility. To address this, we must rally the combined efforts of government, banks, and industry stakeholders. Private developers, in particular, need the backing to deliver a diverse range of residential accommodation options, from affordable housing to luxury developments.
This is not just a matter of policy but of urgency. Without significant intervention, the supply-demand imbalance will continue to deepen, with far-reaching consequences for our economy and society.
The Road Ahead
While 2025 may not bring immediate relief for the commercial property market, it presents an opportunity to address foundational issues and rebuild for the future. From retail and industrial to emerging sectors like PBSA and BTR, there are bright spots to leverage.
However, for the market to truly recover, a coordinated effort is essential. It will require bold decision-making, investment in innovation, and a commitment to collaboration across all levels of government and industry. Only then can we hope to restore confidence and set the stage for long-term growth.
Until next time, Mark Wizel