The latest ABS data release on building approvals has recorded some encouraging results for commercial sectors, up 2.0 per cent for November 2022 in contrast to residential dwellings which have shown a 4.0 per cent decrease in terms of value, seasonally adjusted. Industrial and office/retail assets are showing good growth when looking at the original data series, however, when coupled with the latest finance commitment data, it suggests the commercial markets may still be some time away from a development resurgence.
Industrial approvals have recorded a 34.9 per cent increase on the month, or 101.4 per cent improvement compared to last year, to represent $1.3 billion in value. The prolonged low vacancy environment across the industrial market has spurred on the need for additional supply in all regions and, despite the continued high construction costs and cost of funding, the overwhelming need for stock is likely to see industrial as the sole sector where construction will rebound in 2023. Victoria and its availability of vacant, zoned industrial land has seen a 133.6 per cent increase in approval values this month with WA up 89.6 per cent, whereas NSW and its constrained land supply has only seen a 10.2 per cent increase in approvals this same period.
The performance of the office and retail sectors has shown great volatility over the last few years with occupancy levels a key concern for this market segment, while building approvals are up on last month. The greatest increase has come from NSW and WA while Victoria and Queensland results have seen some decline in activity. Similarly other non-residential sectors such as education, medical and aged care have all recorded annual declines in building approvals this period.
Despite the overall improvement in approvals, concern surrounding the increased cost to finance future developments will see construction starts lag given the downward movement in financing commitments across the commercial markets continue to be recorded. New loan commitments for construction are currently at their lowest rate since April 2013, this month recording just $943 million a 62.1 per cent decline on the month and 59.3 per cent decrease over the last year. With the expectation of financing costs to continue to move upwards this year, we are likely to see continued lows in new construction finance and the development pipeline to remain on hold.
While commercial construction will be impacted this year by reduced loan commitments, so too will lending on the purchase of property which has recorded a 18.4 per cent reduction on last year’s results. Therefore, we expect to see commercial sales volumes continue to decrease in 2023. In 2022 Australian commercial sales fell by 30 per cent in comparison to 2021 results due to market uncertainty and the rising cost of finance which is likely to be further exacerbated this year.