Unless you’ve ignored all the news for the past few months, you’ll be aware of interest rate rises due to inflation rising above the nominal targets of the Reserve Bank of Australia (RBA). And while fiscal policy can’t address all the factors of inflation, the rises in interest rates will cool what was an overheated property market.

What do interest rate rises mean for commercial property?

According to RBA Head of Domestic Markets, Jonathan Kearns, higher interest rates mean a reduction in the maximum loan size for households. For residential mortgages, this translates into a fall in maximum loan size of about 20 per cent. However, Kearns also notes that most borrowers don’t take the maximum loan allowed by their bank.

Commercial property follows a slightly different trajectory. Pricing and interest rates for commercial property need to take into account the higher risk of owning this class of property.

Over the past few years, we’ve seen several factors that have affected sale price and returns on commercial property.

High street retail took a hit over the pandemic as shoppers were forced to turn to online shopping. This meant not only were retailers not able to influence shoppers through the physical shopping experience, but also, they were now competing with international retailers who could offer lower prices due to economies of scale. However, we’re pleased to note that once restrictions were lifted, shoppers returned in droves to physical retailers, almost as an act of patriotism and a desire to lift their local communities.

Owners of office property are facing uncertainty with the continuance of hybrid or distributed work. This factor, however, hasn’t stopped larger institutions from investing in new office space that’s designed for a hybrid workforce. Some organisations have most employees back in the office. This is especially true for organisations that need to have face-to-face interactions with clients and suppliers or organisations such as architectural practices where collaboration is key.

The stand-out performer over the pandemic was industrial; in particular, warehousing and logistics. As available space tightened in capital cities, organisations looked to regional areas from where they could carry out their business cost-effectively.

Fundamentals for commercial property

While the sector faces challenges, there are some positives that make commercial property a solid investment for buyers.

Unemployment is at record lows. In fact, the last time unemployment rates were this low was in the 1970s. Wages are on the rise, which will help spending power even in this inflationary period. And overall our Australian economy remains strong.

According to global commercial real estate firm, Cushman & Wakefield, commercial real estate investment in Australia for the June quarter was $11.3 billion. The office market was strong with large real estate investment trusts and other institutional investors making significant deals in offices.

Industrial fared well with $2 billion in transactions, the third-highest recorded. While this figure is down from the peak of $8.3 billion over the same period in 2021, the investment shows continued confidence in this sector.

Retail too is down from 2021 but still a healthy $1.9 billion in sales over the June quarter.

Overall, investment in commercial real estate, despite rising inflation and interest rates, is vigorous

Buyers and sellers of commercial property

Interest rate and bond yield rises might lead to a reduced number of smaller-scale buyers due to yields. However, this is balanced by larger players cherry-picking good assets in prime locations, and a rise in values.

As a long-term asset, Australian commercial property is still attractive, especially to overseas buyers who value a stable government and a well-run economy.

Can we help with your Mount Gambier commercial property?

Call Herbert Commercial on 08 87 250 500 for a complimentary annual investment portfolio assessment. From this assessment, feedback may warrant the need to seek Herbert Commercial’s advice and expertise with formulating a plan to action restructuring or renegotiating the best lease scenario moving forward. We’re here to help.

As the only dedicated commercial property agency in Mount Gambier, we have a network with and are sought after by national commercial agencies as a trusted extension to their services. Our wealth of commercial knowledge of the Mount Gambier market extends to the broader commercial market, meaning we can ensure you achieve your commercial property goals.