Canberra Market Monitor - 2024

CANBERRA

MARKET MONITOR Local market performance and insights

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

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LJ Hooker Commercial

Franklin Street, Manuka

Key Market Indicators Sales Q2 2024

OUTLOOK TO Q2 2025

Sales price $/sqm

Investment yield

Office

$6,000 - $8,000

6.25% - 7.50%

Industrial

$3,000 - $4,500

6.00% - 7.50%

Retail

$8,000 - $10,000

6.25% - 7.50%

A Grade

Value

Supply

Demand

Yield

Leasing Q2 2024

OUTLOOK TO Q2 2025

Rent price $/sqm

Incentives

Office

$470 - $550

20% - 28%

Industrial

$250 - $300

0% - 5%

Retail

$500 - $800

8% - 12%

A Grade

Canberra Market Monitor

Rent

Supply

Demand

Incentive

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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

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LJ Hooker Commercial

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.

Canberra Market Monitor

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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).

CANBERRA

AUSTRALIA

Feb ’24 (000)

264.4

14,269.6

Feb ’23 (000)

265.2

13,832.5

Change (%)

-0.3

3.2

Feb ’24 (000)

11.5

548.3

Feb ’23 (000)

8.2

513.3

Change (%)

41.2

6.8

Feb ’24 (%)

4.2

3.7

Feb’23 (%)

3.0

3.6

Employment

Unemployment

Unemployment Rate

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

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LJ Hooker Commercial

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 Market Monitor

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Canberra - Largest Employing Industries

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

70 Northbourne Avenue, Canberra

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LJ Hooker Commercial

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

2026

2031

2036

2041

2046

Belconnen

Canberra East Gungahlin Molonglo

North Canberra

South Canberra Tuggeranong

Urriarra - Namadgi Weston Creek Woden Valley ACT Total

Source: ACT Government, Treasury, 2022 projections

Canberra Market Monitor

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LJ Hooker Commercial

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.

Canberra Region – Gross Value Added by Sector FY22

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 Market Monitor

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PROJECT Canberra Hospital Expansion

EPIC (Exhibition Park in Canberra)

CIT Woden Campus and a new CIT

Yurauna at Bruce

STAGE

$661m

Construction

N/A

$325.1m

& Education Precinct

existing hospital in Woden

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

Construction

to 6,500 students at Woden campus. New transport interchange, to be built

Contracts

Continuing Alinga Street to

$500m+

Early planning

Commonwealth Park to Woden

$500m+

Early planning

Light Rail Stage 2B

Bruce Sports, Health

New Critical Services Building at

EXPECTED COMPLETION

Mid 2024

Mid 2024

2025

adjacent to the campus

$500m+

Centre Precinct

Early Planning

DETAILS

New campus to support up

Light Rail Stage 2A

Canberra Convention

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VALUE

signed

Commonwealth Park

Continued planning for a new Convention Centre

2027

2033

N/A

New 30,000 seat rectangular $500m+

Early planning

stadium and precinct linking

AIS, University of Canberra and

N/A

Northside Hospital

LJ Hooker Commercial

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.

PROPERTY

7 London Circuit, CBD

18 Marcus Clarke Street, CBD

2 Faulding Street, Symonston

1 Taubman Street, Symonston

9-11 Molonglo Drive, Airport

23 National Circuit, Barton

19 National Circuit, CBD

Blocks 10 & 11, Section 100, CBD

15 Sydney Avenue, Barton

Canberra Market Monitor

APPROX. AREA (SQM)

DEVELOPER

TIMING

TYPE

8,500

ISPT

H1 2024

Refurbishment

13,500

ISPT

H1 2024

Refurbishment

6,000

Evri Group

H1 2024

New build

3,400

Nikias Diamond

H2 2024

New build

H1 2025

New build

19,450

Capital Airport Group

4,600

Doma Group

H1 2025

New build

18,100

Cromwell Group

H2 2025

New build

H1 2026

New build

H2 2026

New build

34,200

37,000

Morris Property Group

Doma / Kenyon Investments

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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.

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LJ Hooker Commercial

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.

68 Northbourne Avenue, Canberra

Canberra Market Monitor

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LJ Hooker Commercial does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and projections. LJ Hooker Commercial will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. © LJ Hooker Commercial 2024