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YOUR COMMERCIAL PROPERTY AND BUYER SENTIMENT IN A SOFTENING MARKET

By Lynne Goodwill

A MARKET CHANGE OR CHANCE?
It’s called a property cycle for a reason, but that doesn’t make it any easier to swallow when we realise the closest peak may be in our rear-vision mirror. The first quarter of this year saw further yield compression, adding to six previous quarters of value increases. With low vacancies pushing rents up through this same period, as commercial property owners, we received a long-overdue double-bump in capital growth. Buyer sentiment is now changing and all indicators point to the conclusion that we reached the peak of this most recent cycle just prior to Easter this year.  So, once again we aim to answer the question:
WHAT DOES THIS MEAN FOR COMMERCIAL PROPERTY IN THE NORTHERN CORRIDOR?
WHAT HAS CHANGED?
The run of interest rate rises has had the most direct impact on buyer sentiment. Further projections of rate rises has some buyers factoring in a like-for-like rise in commercial property yields.
“IF INTEREST RATES ARE GOING UP 1.5% THEN I NOW WANT A 7.5% RETURN, NOT 6%”
It is this sentiment, combined with the flood of other scare-factors that sell papers during this phase of the cycle, that have the less motivated buyers talking themselves out of action and onto the sidelines. Sophisticated investors understand that the true benefit of a commercial property is much more nuanced than this, but they welcome the drop in competition and the ability to make slower, more measured decisions. Owner-occupiers are beginning to show similar caution due to the perception of their repayments “doubling” with rate rises.
WHAT CAN WE EXPECT?
1. The volume of enquiry for tenanted investments will likely soften in the coming quarters, due to reduced urgency from motivated buyers and the exiting of unmotivated or opportunistic buyers from the market.
2. The volume of enquiry from potential tenants will likely increase, as some owner-occupiers with less robust balance sheets default back to leasing for another term.
3. Knee-jerk reactions may see some new construction projects for speculative stock shelved in the short term until building prices soften a little. This will put an even greater squeeze on the already limited supply across our region.
4. The most frustrating part of this cycle for all of us genuinely engaged with the commercial property market will be the return of the bottom-feeder buyers. These buyers are easy for us to identify based on their willingness to engage in meaningful due diligence beyond “Offer them 10% and see what they say”.
5. Genuine buyers will remain strongly engaged, but we can expect their due diligence process to be more thorough and their final decision-making timeline to be a little slower.
WHERE IS THE OPPORTUNITY?
1. If we zoom out slightly and look at things on the scale of the world economy, commercial property in the Northern Corridor remains one of the best returning, best-insulated refuges
2. Most commercial property owners across the northern corridor have experienced north of 30% capital growth in the last two years and the opportunity remains to cash in on this uplift as the market tops out.
3. Owners willing to take the extra steps with their agent and prepare their property for sale with the right due diligence material will be able to position their property above the pack of standard listings and squarely in front of engaged buyers.
4. As agents, we can counter some of the downward pressure on price expectation with supporting evidence highlighting the record low vacancies, strong rental growth through current CPI, high construction costs and population growth projections for the Northern Corridor
The danger for sellers unwilling or unable to wait out the next cycle is being too slow to meet the market and potentially missing out on banking a large portion of the 30%+ value increase they have experienced in the last two years.
As the market begins to soften, we have historically seen the gap between buyer expectation and seller expectation widen. In a rising market, buyers set new benchmarks quickly and with confidence, while sellers and valuers are relying on months-old data. This tends to compress the gap between buyer and seller.
Satisfaction surveys across the Ray White group indicate sellers at this point are happy in the short term but then feel remorse as the market climbs.
In a softening market, buyers are first to react to fear, while sellers hold on to the high-water mark of recent sales, hoping that this might be just a “blip” in the market. Sellers at this point are less satisfied in the short term, but happier as the true nature of the cycle unfolds.
Whether you are thinking of buying selling or retaining, we are here to help you make better commercial property decisions. Call us today to discuss what this means for your specific commercial property goals.
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