Lessons from Melbourne: how prolonged lockdowns affect commercial property

Sydney’s CBD during its latest lockdown. Picture: NCA Newswire/Gaye Gerard

It’s no secret lockdowns are disruptive for business, and for the industry selling and leasing the spaces businesses use, that impact is fairly pronounced.

So, seven weeks into Sydney’s lockdown with no firm end in sight, what’s the outlook for the Harbour City’s commercial property market? Looking to Melbourne’s experience in 2020 could hold some clues.

Comparing the two cities, some familiar trends are already emerging.

First, the impact of lockdowns differs by asset class. During Melbourne’s second lockdown, office, strip and CBD retail suffered the largest falls in demand on realcommercial.com.au, both from buyers and occupiers.

In contrast, assets such as industrial, childcare and large format retail proved resilient. Behaviour on realcommercial.com.au over the past month points to these same trends in Sydney.

Another lesson learned from Melbourne is that lockdowns impact the market to lease commercial property more than the market to buy. While searches to buy commercial property did fall during last year’s lockdown in Melbourne, the magnitude of the decline was less than that seen in the leasing market.

Searches to rent commercial property in Victoria fell by 8.5 per cent between the June and September quarters last year, compared with a decline of 5.7 per cent in searches to buy. The impact in NSW has been even more pronounced, with a 16.5 per cent reduction in lease searches between June and July of this year, compared with just a 6.2 per cent fall in buy searches.

In addition to restrictions limiting physical inspections, uncertainty around the length of lockdowns and timelines for reopening have caused many businesses to delay leasing decisions. Changing density limits and the ongoing risk of unpredictable snap lockdowns are also a challenge for businesses when determining how much space to lease.

Despite the ongoing challenges in the sector, investor confidence in commercial property has been creeping back, even for the harder hit asset classes.

For buyers currently looking to purchase commercial property, their desired holding periods are likely to extend beyond this pandemic. With the vaccine rollout underway, and Australia’s economic recovery outpacing expectations, Sydney’s current lockdown may not prove much of a deterrent to buyers.

Despite this, and as was the case in Victoria, many vendors will choose to delay selling until restrictions ease, which could lead to fewer transactions. Last year in Victoria, for example, there were 24 per cent fewer commercial properties sold during the heavily restricted September quarter compared with the quarter prior, according to Real Capital Analytics.

Any decline in the supply of commercial properties for sale, combined with the recent slowing in searches to buy, will impact sales volumes in Sydney over the coming month.

So, what lies ahead for Sydney? Well, based on the experience of Melbourne, market activity is likely to remain subdued throughout the remainder of lockdown. However, demand will not go dormant and will build as the end of lockdown comes into sight. From there, we anticipate a significant upswing in sales and leasing activity once restrictions ease.

Anne Flaherty is an economist with REA Group