Canberra Market Monitor - 2024

Canberra Commercial Real Estate: Robust and Resilient Amidst Challenges

This report delves into the current state and future outlook of the commercial property market in the Australian Capital Territory (ACT). As the administrative heart of Australia, the ACT’s property market holds significance not only for local residents and businesses but also for national and international investors seeking unique commercial real estate opportunities.

In the face of evolving macroeconomic conditions, the outlook for the ACT’s commercial property market is characterised by a blend of resilience and adaptation. While challenges such as inflationary pressures and fluctuating employment rates persist, the market demonstrates pockets of strength, particularly in sectors such as retail and healthcare, which present promising avenues for investment.

Employment trends and population dynamics continue to shape market dynamics, with the Public Administration and Safety sector maintaining its dominance in employment. However, shifts in sectoral preferences and demographic trends necessitate a proactive approach to meet evolving market demands and capitalise on emerging opportunities.

Furthermore, the interplay between investment demand, tenant preferences, and supply dynamics offers valuable insights into the future trajectory of the ACT’s commercial property market. From the industrial sector’s sustained demand for warehouse space to the evolving needs of office tenants in a post-pandemic era.

Bunda Street, Canberra

Macroeconomic Outlook

Inflation

In March 2024, the Consumer Price Index (CPI) in Australia saw a 1.0 per cent increase for the quarter and a 3.6 per cent rise annually, according to the Australian Bureau of Statistics (ABS). Notably, this annual figure marks a decrease from the previous quarter’s 4.1 per cent and a significant drop from the peak of 7.8 percent recorded in December 2022. The rise in the March quarter was predominantly driven by increases in Education (5.9 per cent), Health (2.8 per cent), Housing (0.7 per cent), and Food and non-alcoholic beverages (0.9 per cent). Within education, tertiary education fees surged by 6.5 per cent due to annual CPI indexation, while rental prices, the main driver of the housing increase, climbed by 2.1 per cent.

121 Marcus Clarke Street, Canberra

Retail Trade

In the first quarter of 2024, Australian retail sales volumes declined by 0.4 per cent (seasonally adjusted), continuing a pattern of fluctuation seen in recent quarters. This downturn reflects reduced consumer spending on major household items. It marks the fifth decline in six quarters, with retail volumes down by 1.3 per cent compared to the same period last year. Per capita retail volumes also saw a seventh consecutive quarterly decrease, indicating sustained pressure from rising living costs. The decline was particularly pronounced in household goods retailing, while other sectors experienced mixed results.

Business Sentiment

NAB’s Monthly Business Survey indicated a slight improvement in confidence but also a slight decrease in business conditions. Overall, businesses reported relatively steady conditions. However, capacity utilisation, a leading indicator of employment conditions, continued to slowly decline. Businesses directly involved in discretionary retail and food and beverage sectors are likely to face tough trading conditions throughout the year. Consumer financial relief may not be felt until there are cuts to the cash rate, which seems unlikely until early 2025. However, businesses, particularly non-retail ones, are less pessimistic than consumers.

Interest Rates

The decision by the RBA to maintain the cash rate at the May 2024 meeting was unsurprising given the lack of evidence suggesting continued overheating of the economy. National Accounts data released earlier in March provided solid evidence that monetary policy tightening is impacting domestic demand as intended. GDP growth was modest at 0.2 percent over the December quarter and 1.5 percent through the year. Per capita GDP has been negative for three straight quarters, indicating a ‘per capita’ recession. Interest rate relief for businesses is unlikely until the fourth quarter of 2024, given persistent elevated services inflation. Additionally, there is a risk of no rate cuts in 2024, considering stubborn inflation in the USA and challenges in bringing inflation back to target levels domestically and overseas.

Impact on Commercial Property Market

Economic output in Australia for the first half of 2024 is expected to be subdued, with businesses cutting back on inventories and reporting slowing turnover, particularly in the discretionary retail sector. As we potentially enter the last phase of the monetary tightening cycle, interest rate relief may be on the horizon for homeowners and businesses by the fourth quarter of 2024 or early 2025. Demand for office property in capital cities remains subdued, and an increase in commercial property transactions is not expected until 2025. However, in Canberra, consistent demand from Federal Government tenants and their contractors provides some protection against high vacancy rates.

Employment Overview

Employment Trends in the Canberra Region

The Canberra region saw a slight decrease in the overall number of employed individuals over the year leading up to February 2024. Additionally, there was a notable increase in the number of unemployed individuals, although this rise stemmed from a low starting point. By December 2023, there were 6,715 online job advertisements in Canberra, with the largest categories being general clerks, software and applications programmers, and sales assistants (general).

Source: Jobs & Skills Australia, Labour Market Data Dashboard, Canberra, February 2024

The significant rise in the number of unemployed individuals in Canberra has caused the unemployment rate to transition from being well below the national average in February 2023 to now being well above it as of February 2024. Canberra’s long-term average unemployment rate stands at 4.0 percent, with the current rate hovering just above this average and displaying a gradual increase since around mid-2022.

Canberra Unemployment Rate - Feb 2014 to 2024

Source: ABS Labour Force, February 2024

Bunda Street, Canberra

Canberra - Largest Employing Industries

Source: Jobs & Skills Australia, Labour Market Data Dashboard, Canberra, February 2024

70 Northbourne Avenue, Canberra

Predictably, the largest employing industry in Canberra is the Public Administration and Safety sector. This sector expanded its share of employment between February 2023 and February 2024, with nearly one-third of employed individuals in Canberra now working in this sector. The Professional, Scientific & Technical Services industry follows as the next largest employer in Canberra. However, its share of employment has declined, likely due to hiring pauses and redundancies in the government-affiliated consulting sector.

Population Growth

The overall population growth rate in Canberra is anticipated to reach its peak between 2026 and 2031, with the majority of this growth concentrated in the Molonglo growth area. Situated between the districts of Belconnen and Weston Creek, Molonglo is approximately 10km from the Canberra City Centre. During the period from 2026 to 2031, Canberra’s population is projected to increase by just over 45,000 individuals, with almost 15,000 of them expected to settle in Molonglo. Concurrently, North Canberra is forecasted to see a population growth of 11,544 residents over the same timeframe.

ACT Population Growth Forecasts

Five years to

Belconnen

Canberra East

Gungahlin

Molonglo

North Canberra

South Canberra

Tuggeranong

Urriarra - Namadgi

Weston Creek

Woden Valley

ACT Total

Source: ACT Government, Treasury, 2022 projections

Business Conditions

The construction sector is the most productive in the Canberra region, contributing 11 percent of the value added to the local economy. It is closely trailed by the Health Care and Social Assistance sector, as well as the agriculture sector. Despite being the largest employer in the region, Public Administration and Safety contribute approximately 8 percent of the value added to the local economy. Regarding overall growth, the health care sector has experienced a remarkable 210 percent increase in its value added to the economy since 2016/17, marking the most substantial growth among all sectors.

Source: .idcommunity, Canberra Region Joint Organisation (CRJO)

Impact on Commercial Property Market

The Canberra region maintains robust demand from the Federal Government sector, which stands as the largest employer, and the construction sector, the leading industry in terms of value added to the economy. A significant portion of demand in the industrial sector arises from small businesses supplying or contributing to the housing construction sector, and this trend is projected to persist as new growth areas undergo development. Despite the entrenchment of Working From Home (WFH) practices in the workforce, the need for office space by the Federal Government largely remains stable.

Canberra Region – Gross Value Added by Sector FY22

Canberra Hospital Expansion

EPIC (Exhibition Park in Canberra) N/A Early Planning

New Critical Services Building at existing hospital in Woden

Refurbishment of Fitzroy Pavilion and construction of new large multipurpose exhibition hall.

CIT Woden Campus and a new CIT Yurauna at Bruce

$325.1m Construction

New campus to support up to 6,500 students at Woden campus. New transport interchange, to be built adjacent to the campus 2025

New 30,000 seat rectangular stadium and precinct linking AIS, University of Canberra and Northside Hospital

Office Projects Under Construction

There are currently nine office projects under construction or being refurbished in Canberra. Once these projects are complete, we expect a pause in the supply cycle as backfill supply is worked through, and also as many developers now require construction costs to stabilise in order to get projects green lit. With the exception of 15 Sydney Avenue, which is fully pre-committed to the Federal Government and will be the Australian Tax Office’s (ATO’s) new headquarters, all new builds and refurbishments are being speculatively developed.

Supply and Demand Outlook

Investment Demand

Demand from investors and developers in the office market continues to be impacted by high-interest rates, significantly higher construction costs and WFH practices. After a period of solid investment activity pre-COVID when many major REITs entered the Canberra office market, there is now little investment-grade stock on the market and next to no transaction activity. One or two countercyclical buyers may transact in the current environment; however, the lack of sellers in this environment will hamper activity.

The industrial sector has been the strongest sector in the market since COVID-19. There has been very strong demand for industrial land and warehouse space, particularly from owner-occupiers. These buyers tend to be construction firms or manufacturers/suppliers to the construction industry. While demand from both investors and owner-occupiers has been consistent since the end of the pandemic, lease listings have increased since early 2024, suggesting demand may have now peaked.

We expect with continued high-interest rates for the remainder of 2024 that demand in this sector will normalise, although continue to outperform other sectors. Softening yields due primarily to the significant rise in the cost of debt mean that stock in the retail sector remains tightly held, and there has been very little transaction activity due to limited forced sales and the general lack of motivation of owners to sell at reduced levels.

Tenant Demand and Supply

Demand for office space continues to hold up relatively well, despite WFH practices becoming entrenched in the government workforce. Major briefs coming out from government tenants are by and large seeking a similar amount of space to that they currently occupy. Private sector tenants below 500 sqm are predominantly seeking fitted-out space. Owners who speculatively fit out office space are doing well as a result.

The consulting sector continues to dominate the private market, and there is reasonable demand from smaller consultancy firms as the Federal Government looks to engage firms outside the ‘Big 4’ consulting firms. There is also good demand from tenants working in the Defence, IT, and Cybersecurity fields. Human Resources (HR), IT, and Management Consultants are also seeking space, albeit mostly at the smaller end of the market. The Property Council of Australia (PCA) office market vacancy rate for Canberra was reported as 8.3 percent, far below the national CBD average of 13.5 percent. Despite a reasonably low vacancy rate in comparison to other markets, we still expect incentives to increase in B and C Grade as tenants look to avoid capital contribution to their tenancies as far as possible.

Demand for industrial space continues to be strong, particularly in Hume where there is significant new construction activity and in Mitchell where there is very limited new supply in the pipeline. Despite supply increasing, we expect rents to still increase due to continuing rising construction costs. Incentives, however, have flattened out.

The retail occupancy market is doing well in prime central areas and areas around major shopping centres where there is major traffic flow or high-profile retailers and food operators. The influx of food and beverage operators in the last few years has started to slow, and Canberra is now arguably oversupplied for food operators. Incentives are rising as vacancy in some areas rise, and also due to the very high cost associated with getting any retail tenant to move or open in new space.

LJ Hooker Commercial Canberra canberra.ljhcommercial.com.au

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Dickson ACT 2602

Phone (02) 6247 0222

Email glyons@ljhccanberra.com.au

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