The burning question for commercial real estate is ‘Where to now and what can we expect in the coming months?’.
The property market has remained remarkably resilient despite the global health crisis and the dire predictions. Residential property has boomed with unprecedented demand, another lift in prices and new records set in many regions. Commentators are linking strong demand from returning kiwis and investors with ‘fomo’ who are rushing to protect their income and secure a property that will provide a better return than the lowest ever term deposit rates.
COVID-19 Impact on Commercial Property
The impact on commercial property has been mixed with ‘change’ across all sectors. Unlike the GFC, the COVID-19 pandemic wasn’t caused by economic issues. Hopefully, a positive factor which will lead to a lift in consumer confidence and an accelerated recovery now we are back in Alert Level 1, subject to New Zealand continuing to hold the virus at bay.
Retail, office, hospitality and tourism have been the hardest hit. The opening of New Zealand’s borders and the restart of tourism will be a huge positive allowing money to flow in and international buyers to re-enter the market.
Given the new ‘work from home’ phenomena finding favour on many levels, we expect to see a rise in the volume of office vacancies and vacancy periods, especially in the CBD. As businesses develop strategies around this it will lead to growing downward pressure on rentals and with this, escalating incentives to tenants such as rental holidays and fitouts. There has already been a sharp rise in office space available for sublease/assignment, tenants are downsizing/relocating, requesting rental reductions, reviewing renewal provisions and asking for incentives if they stay.
Retail has been similarly hard hit, evidenced by the growing number of vacancies, particularly visible in Takapuna, Parnell, Ponsonby, Newmarket and the CBD. Lockdown and the lack of office workers buying food, shoppers staying home and a move to online shopping all contributing to store closures. Retail vacancy is expected to climb as small businesses that have hung on with landlord assistance lose their battle and close. As retail rents come under pressure, some landlords will need to weigh up vacancy and the costs to re-lease against dropping rents and maintaining income.
As always, changing markets create opportunity. For experienced investors willing to balance risk against reward there will no doubt be some attractively priced properties available. In the short-term, retail properties are less likely to appeal to investors until tenancy issues settle and the real impact of COVID-19 becomes clear.
Industrial property is definitely the most sought-after asset class, attracting the largest share of leasing and investment activity. Fuelled by low interest rates, owner-occupiers are as active as investors, often competing for vacant properties with multi offers. Throughout the lockdowns industrial enquiry and demand did not let up. Vacancy levels have remained low with rentals for modern, well-configured buildings showing no signs of easing.
Demand from investors for good quality, well-located, tenanted industrial properties is very strong as buyers seek out alternatives to the lowest ever term deposit rates. As a result, yields on properties have declined sharply with prime quality properties now achieving 4% to 5%. More than ever, attention is being focussed on the tenant’s business, the impact
of COVID-19 and the future risk of business interruption. Businesses deemed essential services are perceived to
offer superior stability, being clearly favoured and often commanding a premium.
A Balancing Act
Uncertainty remains the only certainty. As lockdown restrictions are lifted and we head into a period of unpredictability there will be an increase in properties available, growing vacancy levels, extended vacancy periods and in some instances pressure on rents in a difficult lease environment requiring greater tenant incentives. Caution is advised, but as always there will be a need to buy/sell and lease commercial property and with this will come enticing new opportunities at every level.
Low interest rates will be the market’s saviour, long may they continue to prevail.