The news is mostly bad for commercial property investors

Investopoly

All investment asset classes move in cycles. Investment returns are almost never linear. As such, investors must expect good and bad periods, which is why patience and discipline are big contributors to an investor’s success.

I suspect that commercial property investors’ patience and discipline are about to be tested. This asset class is facing a lot of challenges. However, as they say, every cloud has a silver lining so there could be good investment opportunities over the coming months and years.

What challenges is commercial property facing?

Commercial property was the asset class that was the most adversely impacted by Covid lockdowns, especially the retail and office sectors.

Commercial property landlords had to provide rent waivers and reductions to retail tenants to help them through lockdown periods. But, unfortunately, not all retail businesses survived which increased vacancy rates.

Employees were also encouraged to work from home for long periods of time. This experience demonstrated that people did not necessarily need to be in the office full-time. As such, most of the office workforce has adopted a hybrid work model that involves working from home 2 to 3 days per week. The consequence of this is that large employers have reduced their commercial office footprint. In addition, businesses have been less inclined to commit to new leases until they can ascertain what long-term working arrangements may look like.

The upshot of this is that tenant demand for office and retail property is very low at the moment.

That said, things are changing - albeit slowly. More employers are demanding that their workforce spend more time in the office. nab is probably the largest corporate leading this charge demanding all senior managers work from the office 5-days per week. I expect other large corporates to follow, especially if the unemployment rate normalises (it’s currently 3.5% - the normal level is circa 5%).

But the real problem is cap rates!

Cap rates is an abbreviated term for capitalisation rate. It is the key component used to value commercial property. Unlike residential property, the value of a commercial property is dependent on the rental income that a property generates (whereas residential property is driven more by the value of the underlying land).

Therefore, to value a commercial p

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