_Reduced liquidity and leasing market uncertainty headline the immediate market impacts

The extended period of shutdown has resulted in a sharp reduction in demand in the hotel, leisure, retail, and student accommodation sectors, which will quickly flow through to reduced income, higher vacancy risk and lower values. Investment and leasing volumes across all sectors will also be well down in coming months, and we have already seen clear evidence of this in the first three months of the year. 

The impacts on rents, yields and values in other sectors are more uncertain and will take longer to play out. While higher vacancy and declines in rents and values can generally be expected, these will not be uniform, and will depend on sector, location, product and the stance of different counterparties.

Some of the immediate occupier market impacts include: 

• A sharp decline in hotel trading: the latest data from STR Global reveals that occupancy is down by around 80% year-on-year in Sydney and Melbourne. 
• Reduced impetus for office and industrial leasing: while businesses with an immediate requirement for space will proceed with their plans, others without an immediate need will prefer to wait until the virus is contained before making decisions.
• Co-working operators to suffer a large impact given that much of their space is let out under very short-term arrangements and will not be immediately renewed while social distancing persists.   
• An acceleration of the existing trend toward online shopping from people reluctant to shop in-store. 

Capital markets will feel the spill-over impact of leasing market uncertainty:

• Divergence of views: during this uncertain period, there is likely to be more than the usual degree of divergence between the views and approaches of different investors. Some will want to wait until the spread of the virus stabilises while others will be ready to act to take advantage of any opportunities that may arise as a result of reduced competition.
• Preference for longer WALE assets over those offering shorter income streams with greater distinction between assets based on length of income.
• Higher cost of capital: notwithstanding lower interest rates, credit spreads will widen as banks will perceive higher risk resulting in a higher cost of capital for many investors.
• Yields to rise: economic contraction will lead to reduced rental growth expectations and higher allowances for downtime, particularly in 2020. Coupled with a higher cost of capital and heightened risk aversion, this will put pressure on pricing in coming months, although the impact in different markets will vary significantly. These negatives will be tempered by the offsetting influence of substantial interest rate reductions, exchange rate depreciation and pent-up demand for property which will see many investors remain active. The strength of these forces means that when the spread of the virus is contained, the market is likely to see a strong comeback. 

Read this week's economic outlook here. 

For further information please contact:

Ben Burston
Partner, Chief Economist
+61 2 9036 6756
Ben.Burston@au.knightfrank.com