Open for business.. What impact will COVID-19 have on commercial real estate?

The beginning of 2020 has been full of uncertainty from the devastating bushfires to the global pandemic of COVID-19, but what does this mean for commercial real estate?

While it is still unfolding, the current events have yet to dampen the appetite for investors for commercial real estate. There will be sectors more at risk than others and some sectors will continue to perform strongly, I have outlined some points of interest below.

Despite all the doom and gloom the fundamentals that underpin investment in real estate continue to drive buyer demand.

Interest rates are at record low levels which means the cost of funding is cheap but also money left in the bank is not making a return. The cash rate is at 0.5% and expected to fall again to 0.00-0.25%! The banks will be pressured to pass it on

• The low Australian dollar is continuing the strong demand from global capital.
• Share market volatility is driving confidence to more stable investment returns in property
• Opportunistic investors are increasing buyer competition which enables better leverage to negotiate favourable outcomes on behalf of our vendor’s
• When travel restrictions are lifted for both interstate and international buyer groups, potential sellers who are ready to move quickly will see significant upside from the pent up demand.
• $17Bn in Federal Government Stimulus packages available to support small business. Further packages will likely become available as required
• Some of the major banks have released support measures to support businesses in financial hardship such as the attached Westpac factsheet

So what are some of the key sectors to watch?

Retail – It is probably no surprise to anyone but properties that are exposed to tourism or hospitality will have some challenging times ahead as the social distancing and non-essential gathering restrictions are enforced. Travel agents, airline companies, car rental companies, food and beverage, entertainment etc will be challenged. Experts expect the worst of this virus to pass within 3-6 months, after which we would expect a surge of pent up demand from restricted travel and lifestyle. In the meantime low interest rates, support from lenders and government stimulus packages will hopefully get them through. Supermarkets and non-discretionary retailers will continue to thrive during this period.

Industrial – the supply chain and logistics sector will be interesting to watch. As more people are isolated or avoiding large gatherings to stay home, they’re more inclined to order online and we will be watching the e-commerce market. These goods obviously come from warehouses and industrial facilities and we expect demand for these assets to remain strong.

Medical – commercial properties with medical tenants, unsurprisingly will remain popular. Although allied health tenants such as physio’s, chiropractors, dentists etc might be challenged temporarily, they are generally financially resilient to withstand the 3-6 months that COVID-19 is expected to impact.

Resources and mining – it is expected the resources and related industries will soar off the back on iron ore prices. As China recovers from COVID-19, so will their demand for Australian resources and they will have to make up for stalled progress. This will flow on to office and industrial occupier markets.

https://www.australianmining.com.au/news/resource-exports-expected-to-surge-on-the-back-of-iron-ore/

Agribusiness – There’s not too much analysis required if you look at the shape of the graphs for the price of cattle and livestock below. After so many years of heartbreaking drought, many regions have experienced significant rainfall and the positive impacts flowing through to market prices. Suppliers and related industries will benefit in turn.

https://www.mla.com.au/prices-markets/#

Technology – One of the really interesting impacts this will have will be on how we view technology in the workplace. Will it have long lasting effects that further increase or speed up our reliance to agile working, technology enabled remote working etc. What impact will this have on Proptech & Fintech from human temperature sensors in large office buildings to software which allows end to end technology integration including virtual inspections.

We are taking all of the required precautions as any responsible organisation or individual is at the moment, but we are very much open for business!

If you would like to discuss what this means for your commercial real estate investments and take advantage of the unprecedented market activity, or you are considering adding to your investment portfolio, please contact me anytime.

Michael McCullagh

Managing Director & Partner | Ray White Commercial QLD

M: 0403 426 474

E: mmccullagh@raywhite.com