Australian Market Outlook for 2023 - Cromwell Property Group
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March 14, 2023

Australian Market Outlook for 2023

According to industry experts, commercial property investors will be cautious until interest rates peak later in 2023, while inflation and cost of living pressure will weigh heavily on the economic outlook.

Global independent real estate consultancy Knight Frank predicts that, despite the challenges present in the global economy, the Australian capital markets will outperform others amidst looming downturn and will remain a global safe haven for global investors.

Businesses continue to show a desire to be headquartered in our nation’s cities, with overall demand for CBD office space remaining positive, according to the latest data from the Property Council of Australia (PCA).

Research by the property industry’s leading advocate showed that, on average, demand for office space increased by 0.1% across Australia’s CBDs between July 2022 and January 2023. The future supply of office space in CBD markets is forecast to be higher than the historical average through 2023, before retreating under the average in 2024 and 2025. Supply in non-CBD markets is set to be higher than the historical average in the first half of this year before declining in the following years.

The state of the office market

As businesses countrywide adopt hybrid work models – and employees are encouraged back into the office – the market continues to adapt to the diverse needs of tenants and occupiers. Vacancy rates are shifting slightly across CBDs, Knight Frank predicts that short-term market disruption is more likely to be in the form and function of office space – there is a growing expectation that building owners create office space experiences to entice work-at-home staff back into CBDs.

In the six months to January 2023, tenant demand outstripped supply in Brisbane, pushing the vacancy rate down from 13.9% to 12.9%. The PCA found that there is less than 100,000sqm of office space coming online in Brisbane over the next three years, 72% of which has already been pre-committed.

Similarly, vacancy declined marginally in Perth from 15.8% to 15.6%; and Hobart recorded a drop from 2.7% to 2.5% – now its lowest rate since 2008.

In other capitals, vacancy rates rose slightly – from 8.6% to 8.9% in Canberra; 10.1% to 11.3% in Sydney; and 12.9% to 13.8% Melbourne. Adelaide’s vacancy increased from 14.2% to 16.1%, driven by above average supply additions – as a result, the South Australian capital now has the highest vacancy rate in the country. In those markets where vacancy increased, there were moves toward prime stock over secondary stock. Non-CBD areas saw a decline from 15.2 to 15.1 per cent, with tenant demand lifting 0.3%.


Australian office space trends

There is a consensus among Australian property experts that the following represent the most prevalent emerging trends in the local market. These include:

  • Workplace change is set to continue – hybrid working environments are now the overwhelming majority in most of Australia’s capital cities. As such, businesses are set to continue to evaluate, and adapt to, employees’ changing working preferences. Workspaces will continue to be reworked and refined over the foreseeable future to accommodate occupiers changing needs.
  • The need to create a workplace experience – Knight Frank has found that there is an increasing expectation by building occupants that owners provide experiences and opportunities, including upgraded end-of-trip facilities, wellness centres, food and beverage options and more.
  • Tenants’ ESG interest – ESG concerns are increasingly becoming front-of-mind for building occupiers and tenants, as well as the general population. As such, building owners will need to invest in environment and sustainability in their key decision-making processes going forward.


Examining office rents

According to the latest Cushman & Wakefield Marketbeat report, premium grade gross face rents rose 6.0% in Brisbane over the final 2022 quarter – to average $965 per square metre – one of the largest rises in recent years. A-grade also recorded an increase in gross face rents, though slightly more modest – at 1% QoQ (6% YoY) – and B-grade rents remained stable over the final quarter of 2023.

In the Sydney CBD, prime face rents held at an average of $1,410 sqm per year, increasing 4.2% over the course of 2022. Premium, A-grade and B-grade gross face rents averaged $1,525, $1,335 and $1,045 per square metre, respectively.


The Melbourne Marketbeat report revealed that rents and incentive levels remain stable, as quality office accommodation options remain available in the Victorian capital’s CBD. Premium and A-grade net face rents in Melbourne were steady, reflecting the city’s “new and better quality stock” – rates averaged $725 and $660 sqm per year, respectively.


Industrial property

Knight Frank has found that, as global supply chain issues caused by the COVID-19 pandemic and war in Ukraine begin to ease, and with the container freight cost indexes backdown to late 2020 levels, the industrial market in Australia is facing an acute shortage of space for near term or imminent occupation. This space shortage is forcing adaptation from both occupiers and developers, as they seek to navigate unprecedented market conditions.

Much of the current ‘available’ space is still under construction with very limited existing stock available. Consequently, lease deals are increasingly being negotiated 6-18 months in advance for existing space – an extended timeframe that previously was reserved for new construction.

Industrial rents are growing rapidly and, with competition high, landlords are frequently able to select from a number of competing offers for the same tenancy. Large international and ASX listed tenants are generally favoured in this process, which has left smaller businesses at real risk of being without business premises.


Retail space

According to Colliers, rents and incentives remained stable throughout most asset classes through the final quarter of 2022, the exception being neighbourhood centres – where rents grew +0.4% nationally in response to low vacancies and tenant demand within the strong-performing asset subclass.

By the end of 2022, occupancy levels for retail assets were at 98.53%, up slightly from 98.44% at the same time 12 months prior.

Rental yields have remained stable, when compared to other sectors, as a result of more headroom on a yield spread basis – when compared to the 10-year bond yield and borrowing costs. The national weighted average retail yield was 5.50%, as at the end of 2022.


In summary, the consensus among industry experts seems to be that 2023 will be a year that Australian markets will begin to shake off the impacts of the COVID-19 pandemic and war in Ukraine. 2022 saw some recovery in selected metrics, and the next 12 months will be largely determined by expected interest rate peaks, as well as ongoing inflation concerns. Though a large amount of uncertainty still remains for investors, Australian markets as a whole are expected to outperform others across the world.