Market Trends Impacting Commercial & Industrial Property Values in Melbourne

Navigating the dynamic landscape of Melbourne’s commercial property market requires a deep understanding of the factors that influence property values. This article delves into some key market trends that are currently influencing commercial market values across various property types.

Inner City Industrial Update

The Inner City industrial sector is in a dynamic transitioning state as zoning changes drive underlying land values which impact on outgoings and Land Tax and serves to displace medium and larger industrial type users out to the West. Market strength however is underpinned with the drivers of good proximity to the CBD, transport links and restricted supply with demand primarily from owner occupiers. The inner-city market is also driven by a “gentrification” of older buildings that increasingly no longer meet markets requirements with large landholdings having been developed into modern accommodation for a variety of uses over the past several years. As is becoming increasingly common in this current market, the valuation process initially involved both a consideration of the property’s value based on investment parameters and also its value as a future potential development site. In respect of the first consideration an asset’s core investment value on a pure investment consideration would expect to yield around 2.5% – 4%. However, given the competition between owner occupiers, investors, and developers, yields below this level are now common as investors meet the new order of value which is influenced by the rising underlying land values. This is now applying to both commercial and residential development sites often irrespective of planning permit approvals and precise lease details. Sales support a low yield for these assets with surrounding development sites, representing a ‘surrogate’ for underlying land value rather than solely being investment based or passive investment yields.

West Industrial Market Update

The west industrial sector is the most expansive in Melbourne extending from Footscray/Sunshine out to Bacchus Marsh and Avalon, with the main estates located in Sunshine West, Altona, Laverton North, Derrimut, Truganina and Ravenhall. The location offers a diversity in site areas with a comprehensive road transport infrastructure including the Princes Freeway, Western Ring Road, Western Freeway/Deer Park Bypass. Internet retailing and the e-commerce sector may have had a negative effect on the strip retail and shopping centre environment but to some degree has had the opposite effect for industrial property in this location where flexible warehousing with offices are required to service this growing sector – it has also encouraged many more freight movements and in turn has been encouraging for transport companies. Market strength in the west is underpinned with the drivers of good roadway infrastructure, strong demand from the owner-occupier sector and tightening land supply translating to real growth in land value rates ranging from $700 – $1,200/sqm for circa 2,000 sqm – 5,000 sqm lots. The sub $5,000,000 market is characterised by medium size freestanding modern design office-high clearance clear span warehousing with good loading and an increasing supply of strata office-warehouses targeting the sub $1,000,000 owner-occupier market. Prime investment yields generally range from 4.00% – 5.00%, whilst secondary yields range from 5.25% – 6.25%. Prime rents range from $90 – $130/sqm overall, whilst secondary rents range from $70 – $90/sqm overall. Small factoryette/storage warehouses sub 300 sqm achieve rates from approximately $110 – $200 /sqm, however, it is noted that some smaller facilities lease on a quantum of money basis.

CBD and Suburban Commercial Office Market Update

The rise of remote work post Covid Pandemic has led to reduced demand for office space in general.  While some businesses are reducing their office footprint, others are investing in flexible workspaces to accommodate hybrid work models. This trend is affecting office space demand particularly in Melbourne CBD affecting both rental rates, yields and market values. There is however a growing trend of tenants transitioning to owner-occupiers particularly in suburban areas as business owners seek to work closer to home enabling a more work/life balance.

Impact of Higher Interest Rates and Increase in Land Tax Liability

Interest rates play a critical role in investment decisions in the commercial property sector. Lower interest rates have traditionally made borrowing more attractive, leading to increased volume of sales transaction, firmer yields and as seen in the past five years or so higher market values. Today’s higher interest rate environment together with   new higher land tax rates and increased rating valuations may affect demand, market values and yields during 2024.

For property owners and investors looking to navigate the complexities of the Melbourne commercial property market, engaging with a knowledgeable valuer is crucial. While it’s possible to gather some insights independently, a professional valuation provides a detailed, objective and risk based analysis based on comprehensive market data and expertise.

If you’re considering purchasing a commercial property transaction in Melbourne or require a market valuation, reach out to the experts at Power Commercial Valuations. Our deep understanding of the local market dynamics and professional valuation services will help you make informed decisions that align with your investment goals. Contact Power Commercial Valuations today to ensure you have the expert insights needed for your commercial property endeavours.