Featuring Kate Bailey, Mark Coster, Michael Simpson, Cameron Grier, Meagan Wakefield, Mark Curtain, Jarrod Frazer and Tim Rees.
Thursday 18 March 2021
KB:
Hello and welcome to talking property with CBRE, a podcast for property people by property people. I'm Kate Bailey, Head of Logistics and Retail Research here in Australia and I’m your host for today's episode.
It’s fair to say 2020 didn't play out as anyone expected. The world as we knew it came to a halt amid the rise of the COVID-19 pandemic. Cities were locked down, borders closed, and the lights were switched off in office towers around the world, while hand sanitizer flew off the shelves and face masks became the latest must have accessory.
Australian office net absorption reached a historic low while national vacancy surged to highs not experienced since the late 1990s. Furthermore, lockdowns, trading restrictions and border closures shifted consumer demand towards online retail. But this year, our office towers are lighting up, our cities are reopening, and retailers are welcoming customers in store. 2021 is already looking up.
I sat down with some of CBRE’s industry leading experts to get their take on the trends we can expect to see across the Australian commercial real estate industry in 2021. Have a listen.
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KB:
I'm here with Mark Coster, Head of Capital Markets for CBRE Pacific. Thanks so much for joining me, Mark.
MC:
No problem.
KB:
So, to get us started, can you talk through some of the main trends you expect to see in the cap market space throughout 2021?
MC:
Look, I think we're going to see a continued focus on alternatives, but when I say continue to, that's really going to start to ramp up. The amount of interest we're getting from clients that we’re talking to in the first almost what - first quarter of this year has just been unbelievable around Data Centres, Life Science, Health and Social infrastructure, even Cold Storage and, of course, Multi Family or Build-to-Rent as we know in this part of the world, it's been quite impressive the amount of capital that is now willing to go after those sectors.
We're also seeing logistics continue. So as an office person myself, it's been quite interesting to see how popular sheds have become, and I think that's because I don't think it's just because there's an enormous amount of capital for it, but also, you know there's a real opportunity for industrial specifically, logistics assets in Australia to take advantage of what we're seeing in terms of changing consumer trends so it’s an interesting part of the market and will continue to be so actually the foreseeable future.
KB:
Yeah, absolutely. It's something we probably didn't expect to see this time 10 years ago. So look, on that element of surprise. What's really surprised about investor behaviour over the past year? Do you think this is going to continue into 2021?
MC:
Well, I think, I’ll make that point but probably one other thing that has been really, really interesting this first quarter is the amount of money that’s starting to circle around retail and hotels for that matter. So, the view of some people the market now is that they've been oversold, and there’s some real value there. So that's been something that's really, interesting.
To go back to your other question. In terms of surprises, I think just the agility off the capital markets, community investors, direct and indirect, to be agile around border closures and what they needed to do to remain active in the marketplace. I just think that's been quite amazing. It's, you know, we continue to show deep demand and in part of the market, maybe haven't had as many border closures issues like New Zealand, sadly until recently. But you know, there's a lot of capital for that market remains a lot of capital for Australia, and people find ways to figure it out and keep trading assets. So, it's been good.
KB:
Excellent. All right. What sounds like a really interesting year ahead. Thanks so much for joining us Mark.
MC:
No problem.
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KB:
To I’m joined by Managing Director for CBRE Hotels. Michael is responsible for the management and development of the CBRE’s hotel's business in Australia, New Zealand Thanks for joining me, Michael.
MS:
Thanks Kate, nice to be here.
KB:
Maybe just to start with, can you talk through some of the main trends you're expecting to see in the hotel sector in 2021?
MS:
Sure. So 2020 was a very challenging year, as most people would know in the hotel space we had occupancy levels across most markets really fall drastically as a response to border closures, both domestic and international and given the very high levels of uncertainty and investors inability to price the risk associated with that uncertainty, we saw a very low transaction volumes against historical benchmarks.
In 2021 it feels like we've turned a bit of a corner. So we've got some vaccines that are getting rolled out both here in Australia and around the world were a little bit late to the party in terms of getting them rolling but I think the nation is very committed to that now. We've got very low cash rate and so for debt it's quite a low cost of debt for borrowers.
There's a growing positive outlook from the investment community and also from consumers and if we look at how Australia's responded to the virus, we really are the gold standard, a lot of the countries that almost mocked us previously for closing our borders and restraining movement are now holding us up as that gold standard because we've had so few cases. So from our perspective, what that means is that there are a number of parties that have been waiting on the side lines to see a little bit more visibility and certainty. We're now getting that and so we expect for there to be quite a significantly higher level of transactions this year both in number of transactions and total deal value for 2021.
The other big trend that we're going to see is private equity coming back to the investment market. So in hotel space, there haven't been a lot of private equity investments in the market in Australia for quite some time and there are a lot of those private equity players that have got significant firepower. They've raised money, they've got the ability to raise debt as well, and they're looking at hotels very actively at the moment.
The third thing that I think we're going to see is towards the back end of this year on acceleration in business and leisure travel to the city's. So we've seen how domestic drive to leisure destinations have experienced a pretty strong growth and pretty strong occupancy, despite the effects of the pandemic. But I think we're going to see business travel increase and as the effects of the vaccine start to take shape in the rest of the nation becomes broadly vaccinated. It’s going to encourage people to travel and encourage premieres not to close their borders. So free movement of domestic travel around Australia.
KB:
Yeah, fingers crossed and look maybe just on that kind of idea of the border closures, there's really been a lot of conversation around the hotel sectors and some of the challenges it's been facing. With Australia's international borders closed and also those snap lockdowns you refer to domestically. Are their pockets of the sector that have proved to be really resilient over the past 12 months and maybe even outperformed their forecasts and if so do you think we can expect to see any continued growth in this part of the sector and maybe even sustain the industry going forward?
MS:
Yes, so I think nothing changes the thematic that we’re human beings and that we like to travel. We like to experience different cultures. We like to see things that are further away from our home and experience new experiences. So from our perspective, and one of one of our clients put it beautifully that hotels are one of the last real estate asset classes to be disrupted by technology because those experiences that you get when you travel really can't be replicated by technology.
In terms of some of those drive to leisure markets, we saw markets like Kiama, Gippsland, obviously, everyone talks about Byron Bay, and that's true, it fared well. Orange, Hunter Valley, the Fraser Coast. All those destinations Australians were travelling to, particularly if they could drive there throughout the year last year. So they experienced significant RevPAR, which is our industry measure to measure revenue per available room. Significant par increases over the previous year and the previous year didn't suffer any adverse effects. So it's essentially a material increase from those travellers in Australia that want to get out and see the country.
It's quite widely publicised, but most people would be aware that in 2019, Australians spent about $65 billion overseas and there were over 11 million Australian outbound trips. Obviously, there is not going to be a complete straight line of those numbers back into domestic trouble. But there are a lot of domestic residents that have some disposable income that aren't able to go overseas where they normally would, and they really want to get away and have a holiday and have an experience. So we think that that is a trend that's going to continue for some time until the international borders are well and truly open.
KB:
Fantastic, thanks so much for your time.
MS:
Thanks very much.
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KB:
I'm here with Cam Grier, Regional Director of Industrial and Logistics in the Pacific. Cam is responsible for driving CBRE’s logistics business across Australia and New Zealand and currently oversees the team of over 100 operators working cross these markets. Cam, thanks so much for joining me.
CG:
Always a pleasure Kate.
KB:
Look to start off, I want to ask what are the main trends you're expecting to see across the Industrial and Logistics sector in 2021?
CG:
Sure Kate, I could probably talk to you about trends all day, but I’ll just give you my top three as I see them.
The first trend I believe is we're going to see an increase in the average occupier footprint size and there’s two main reasons for that. Occupiers have fundamentally changed the way they look at their inventory. A lot of users during COVID got caught out and found themselves with not enough stock. Really, that CFO friendly, just in time is dead. I was in a meeting, the other week and I heard something that made me laugh, someone said that ‘just in time’ has been replaced with ‘just in case’ and most major occupiers that we're talking to are telling us they're going to take on a larger areas for inventory going forward and Kate, why they don't mind paying additional space is 5% of total supply chain costs sit within the actual warehouse house itself. So, the much better bottom line equation is they pay a little bit more for their warehouse costs versus the alternative, having no product at all to sell. Secondly, why there is going to be larger occupier footprint sizes is really the widely publicised storey of the rise of e-commerce. We saw a huge growth last year, in e-commerce with about five years growth in one year and I know Australia is certainly behind Asia and the US. Most groups that were talking to have been saying to us Kate that they will, you know, increase their online presence, and that road really only leads one way and that's to larger warehouse footprints.
The second trend that we're going to see this year, and it's a big one that happened last year and will continue again this year, and that's occupiers moving away from 3PL to more of a hybrid insource model, where they take on the warehouses themselves and then simply determine how they want to handle the labour and the transport part. There was a lot of groups that did that last year, JB Hi-Fi, Uniqlo, H&M just to name a few and the benefits to the occupier, they just incur the first cost rather than the first cost plus the margin, they’re able to have the warehouse in exactly the location they want and themselves they’re able to take advantage of some of the generous landlords incentives that are on offer and this is a really great story for landlords. Normally, they get longer leases in some cases, better convenience.
The final trend I'll give you is that we're seeing an increase in manufacturing demand, in particular last year around supply chains and again, we're not going to have manufacturing of cars probably ever in our country. But we're certainly seeing increased demand from food related users, packaging and also in a huge amount of contract manufacturing. So certainly, we're telling a lot of our owners to understand the power, needs and requirements of your facility, but we definitely think that increase in manufacturing requirements will continue.
KB:
A big year ahead obviously in the Industrial & Logistics space then and with that in mind, thinking about that supply and demand equation in 2021 what's your view on what's going happen with rents and incentives as the year goes on?
CG:
Yeah, that's a good question. We do have super low core vacancy along the East Coast, from memory it's about 1.6%. In my view, that will certainly go lower. So if you take a look at that vacancy then you overlay it with what I said before about increased inquiry, shifts in inventory, growth in e-commerce, emergence of reverse logistics which I didn't even mention before. Ultimately this is going to have a positive impact on rents and incentives. Kate, there is so much inquiry at the moment across the country, and it's just a lot of these tenants are chasing the same buildings. We actually agreed terms on 18,000 square metre building and there were another couple of runners on it, so we actually could have auctioned that building off if we really wanted to, which is almost unheard in the leasing sector. I think, really, for existing product we're definitely going to see rental growth this year. I think that'll be the strongest in that sub 10,000 square metre space where we expect to see face rents increase and potentially a little bit of pull back incentives, but certainly in that larger space, so that sort of 20,000 square metre plus our predictions that rental growth is probably going to be more flat. We're predicting potentially a slight increase in incentives, and that's because when you get 20,000 plus, you start to become in that competition with pre-lease where there's certainly a lot of land in particular right now in Western Sydney with all that land coming along in Kemp’s Creek and Aerotropolis.
But I guess to close out your question, I think based on there on the sheer weight of inquiry and what I'm seeing from inquire registers around the country, I think we might outperform some of those rental assumptions, especially in the second half of the year where I believe vacancy will get even tighter.
KB:
Great insights there, Cam. Thanks so much for your time.
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KB:
I'm joined by Meagan Wakefield. Meagan is the Regional Director of CBRE’s Pacific Retail Property Management business. She brings over 15 years of national and international experience in retail management and marketing. Thanks so much for joining me today, Megan.
MW:
Thanks Kate. Great to be here.
KB:
So maybe the kick things off. What trends are you expecting to see across the sector in 2021?
MW:
2021 is going to be a big year for us in retail. I think you know, it was the back of what we saw last year everyone's entered 2021 with an extremely positive and go getter attitude. I think that that's the best way to sum it up. People want to see things being done in 2021 - excuse the rhyme but basically the trends that basically the trends we’re seeing for sure are I guess the community feel is really going to be extended on this year. I know we’ve spoken about it lot and it can feel like a bit of a buzz term but the reality is the focus on bringing our shoppers and our shopping experience back to our local communities is very, very important for our landlords and tenants, creating that space where customers can really feel like they're connecting with their local retailers and the local community is going to be very important. I guess you know, secondly, on top of that, you know that hub and spoke model that we've seen in the office space, it's going to apply to retail. We're continuing to see people shopping locally out in the suburbs so that really leaves and opening for the markets in that CBD space and I think we're going to see a lot of change and a lot of evolution in the CBD retailing space this year.
KB:
Really exciting. So obviously a lot of change happening this year. So, from that, what do you think is the best way that landlords can support their tenants in 2021?
MW:
Just continue to build on that relationship. It was great last year that we had the almost forced relationship from the government coming through that we had to work as a team and it was great to see it happen between landlords and tenants, and I think really, really strong relationships were formed, more so than what they had been. So I think you know, past March and onwards into the remainder of this year just continuing that relationship, that partnership and I don't think we can stress that enough that partnership is key to success for landlords and tenants this year. We have to work together as an industry to make sure we've got successful shopping centres for our community to shop in and that includes successful tenants, as well in our centres. So, it’s really, important that we just continue to focus on partnership. I think on top of that, our landlords really need to build spaces that are attractive to the community to come in and just spend some time. We do know that dwell time leads to shopping, so we've got to continue to do that as a landlord and facilitate our customers to be in the spaces and there's lots of different ways we can do that. Finally, to top it all off, I can't really stress this enough and it’s been spoken about a lot, but it’s that safety element. It's going to be there for a long time, yet customers need to feel safe, hygienic in the shopping centres are so continuing to do that this year is going to be very important.
KB:
Fantastic thanks so much Meagan, great insights.
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KB:
I'm here with Mark Curtain and of Office Leasing in the Pacific. Mark specialises in development project leasing with over 25 years’ experience. Thanks for joining me today, Mark.
MC:
Thanks very much, Kate. Good to be with you.
KB:
So, Mark to start us off what are some of the main trends you're expecting to see in 2021 across the office sector?
MC:
Yeah, I think it's going to be an interesting year for the office sector, primarily as a result of the changes that are being talked about as a result of COVID. I think last year we saw a lot of businesses make emergency responses to the conditions that confronted them. So how do we deal with our people in the short term? In terms of working from the office. From the home? How are we going to reduce our footprint going forward so they were looking at sub-lease opportunities? A lot of that emergency response has now passed, and businesses are now in the 2021 time period and we think a lot of this year will be all about analysing the data, engaging with their staff and developing a long term plan before moving to 2022 where we'll see a lot of those plans implemented and I think, the main issues that occupiers are talking about is workplace design. So, what does the office space look like going forward? We've talked a lot about this concept of events-based working, so you're coming into the office space to engage with your colleagues or staff. But some of those tasks that you might have previously done from a work point you might do those at home.
So, I think one of the trends that will see is a lot of conversation around workplace layout and again, I don't think the markets landed on a specific solution, but we want to create a very different experience in the workplace than what it was like prior to COVID and so one of the things that's clearly playing out in the background is home versus the office and so how do we put in place strategies to bring people back into the workplace? Whether that be through things like food and beverage offerings that might be complimentary to staff, additional amenities like gymnasium facilities within the office or the building environment. So I think one - the trend of workplace design is going to be a big one. But equally it will be also about the base building design. So what will landlords do to - one fine tune their base building offering to make it enticing for people to come in but also putting in place future safeguards that can deal with virus management not just COVID but viruses in the future. So things like H-VAC with ultraviolet light so that it kills bugs as it goes through the air conditioning system. Those sorts of future proofing technologies.
KB:
So Mark, just then you touched on that work from home pace and I guess, with the rise of the hybrid workforce, what impact do you think this is going to have an office demand?
MC:
Lots of discussion going on around workplace flexibility and hybrid working models. I think we, as sector participants, I think we have to accept that there is going to be changed in the market going forward and that employees have got used to a level of flexibility or are going to seek a greater level of flexibility than what had previously been offered. I think a lot of that flexibility was around but perhaps it wasn't utilised or accepted, and I think we've all been somewhat awakened to now the technologies that can be deployed to support it. I'm a big believer in the best outcome for the employer, and the employee is working from the office or the bias should be working from the office, but that we should provide a level of flexibility going forward. So, I think that it's more likely that we would see that to be one day a week where staff were given the opportunity to work from home. I think again a lot of conversation around workplace utilisation going forward and how that may impact office demand in the future. You know, without doubt, a lot of organisations are contemplating formalising or increasing the level of flexibility that they provide to staff, and they're also looking at strategies to support that. So, whether that be an allowance to buy office equipment to utilise in the homework place. But I do think that those that want to work completely from the office and those that want a work completely from home, very much make up the minority groups and the vast majority of the working population from the surveys that we've conducted at CBRE want to work from the office, have a bias to working from the office but have greater flexibility to work from home if their schedule, it means that they can actually perform that task from a home based environment.
Clearly, those sorts of outcomes, if people do adopt a level of working from home, are going to impact office space demands in the short term. But we think that will be an adjustment, a correction that will work through the system simply like when we add additional supply to the market. So, there'll be some additional capacity in the system that obviously over time, gets handed back. And remember, if that everyone was to decrease their office footprint by 20% that wouldn't happen overnight. That would be a progressive release of office accommodation into the system. We would then get back to a new base, and then and then the market could grow again so clearly it will have a level of impact, and I think that's what participants in this sector are anticipating at the moment. But is it Armageddon? We certainly don't believe so. It's a matter of dealing with that supply, like I said it’s simply like a new building coming into the market.
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KB:
Now to the residential sector. Joining me today is Jarrod Frazer, head of CBREs Residential Valuation business and Tim Rees Senior Director of CBREs Residential Projects business. Thanks for joining me, Jarrod, and Tim.
JF:
Thanks for having us.
KB:
Let's kick off with a look through of valuer’s lens. Jarrod, lending figures for the owner occupier market have surged to record monthly highs in recent months, and price growth seems to be accelerating. Jarrod, do you see this continuing? And as some of the government's support pages such own building end, are we going to see conditions level off during 2021 in the residential market?
JF:
The residential market I think, I mean, the stats will show the heat in the market is extraordinary. As it stands, we saw some significant growth in the last quarter of 2020 and that's certainly continued into 2021. If we sat here 12 months ago, I think the numbers that are being put up are quite remarkable. That growth is really underpinned. We think through other factors than government stimulus so more so driven by the significant reductions we’ve had in interest rates over the last 12 months and where they obviously stand today. And there's a jockeying for position from the banks around winning market share and driving down pricing. So, in terms of how we see it from a valuer’s lens, it's difficult for us because we never like to forecast too far ahead. We certainly see strong conditions continuing for 2021 particularly in the first half of 2021. What that means once the government stimulus comes out, is that the areas where particularly the Homebuilder Grant, has been probably accelerating growth that being the mortgage belt areas the South East and the West of both Melbourne and Sydney in particular. We see that being impacted, but as a blanket rule we certainly don't see the market levelling off or deteriorating once those stimulus payments come out, there's too much as I said, there's too many other factors that are driving the market outside of that at the moment Kate.
KB:
Alright and the following on from that. Even though interest rates are at record lows, are you concerned around household debt levels and do you think APRA will need to step up at some stage to encourage a cooling?
JF:
Yeah, if anything, the house I mean on the face but it does look like people are borrowing a lot more money. But I think COVID corrected household debt levels, if anything, last year that we actually might be in a better position than we otherwise would have been given. Let's be honest, we all stayed at home didn't we? I mean, I’m in Melbourne so I certainly stayed home for a great deal of last year. So I think household debt levels are, maybe they haven't come back, but they're certainly plateaued off. So to that end, we certainly see the owner occupiers are driving the market and APRA have on the record, noted that they are keeping a really close watch on the pricing and house values and their potential for a housing bubble. But we certainly at this point, Kate don't see them having to step in, I think, should the investors come back into the market, particularly the second half of this year, and start to drive it even further I think there will be a point in time should that happen, that they may need to step in and create some greater restrictions. But as it stands, hopefully like we spoke about, with government incentives coming out, that it does correct itself naturally.
KB:
Fantastic. Well, it's been a quick start to the year in the in the resi sector, so looking forward to seeing what happens for the rest of 2021.
So, Tim Vacancy rates are already low in smaller capitals on they’re looking to be dropping quicker than anticipated in Sydney and Melbourne. How much longer do you think it's going to be before we can expect to see a large-scale investor focused product in the market?
TR:
Prior to the pandemic, the Sydney vacancy rate was 2.9% in February 2020 and it increased to 4% but we've now seen that reduced to roughly 3.2% in January this year. Sydney, the inner-city ring for apartments has certainly stabilised while we still see weakness in the middle ring markets. We believe it will take another 12 to 18 months before we see any sort of large-scale investor type product being taken up in the market. We really need to see international borders re-opened so that we can see a return of immigration and also the international student market, which is a big driver for rental yields, particularly in the middle ring markets of Sydney and Melbourne. So, we think that 2020 will be continued to be led by owner occupiers. Investors are starting to come back into the market, but certainly not at the levels they were two or three years ago. But we reckon the next sort of 12 to 18 months. We'll start to see an increase in investment type product and investment market in general.
KB:
That's interesting and I guess thinking about that investment market, we know we've got a lower expected population growth in the short term and that's kind of leading to supply pressures. But I guess one thing we're seeing really going the opposite direction is prestige property. Do you think this is being driven by some cashed up expats returning to Australia and do you think we're going to see this across the rest of 2021?
TR:
Well, we certainly have experienced an increase in expat purchases at the prestige end of the market, but I wouldn't say that the highs of that market I've been driven necessarily by experts. They’re a part of it, but what we're sort of seeing more broadly there's a bigger increase in the downsizer market in Sydney. There's limited housing stock, so you're starting to see a boom in the housing market, which then drives up prices for houses. It means downsizers have more money and that they're often able to then spend more money on a new apartment. There's also been a significant increase in lifestyle style purchases since the start of COVID. So you're finding families now said that downsizers are thinking let's get rid of the big family home by an upmarket property, either by the water or in the city or in the Eastern suburbs or lower North Shore of Sydney, and where there's actually there's not as many stock levels of prestige, apartments aren't high, and then demand is sort of outstripping the supply. So that's really driving that market. I think we'll see that continue throughout the year and into 2022.
KB:
Well thanks for your insights. It’s been a great discussion
TR:
Thank you very much.
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KB:
Thanks for joining us on this episode of talking property with CBRE.
For a deep dive into the trends and insights on each sector check out our latest research report ‘Australia's Market Outlook’ by visiting the link in our show notes. If you like the show and want to check out more head to cbre.com.au/talking-property or visit Apple Podcasts or Spotify, where you can listen to some of our earlier episodes or leave a review.
Until next time.
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