Auckland’s housing market and the direction it is heading is a favoured topic with the media, economists, commentators and homeowners alike. Everyone’s an expert and keen to make a prediction – but what about the commercial property market, a hugely complex sector subject to a much wider range of influencing factors.
Auckland’s economy is now out from under the COVID-19 restrictions and fingers crossed that after nearly 2.5 years with life-changing lockdowns and restrictions on businesses we are now on the road to recovery and will move ahead like the rest of the world.
The big question is what are the next 12 months going to bring? As the economic cycle tightens inflationary pressure, rising interest rates, increasing cost of debt, supply chain problems and a host of other factors have bought change with new issues to factor into decisions.
Yields or cap rates are what most investors relate to best as one of the key determinants of value and many acknowledge we have now passed the top of the property cycle. The record low interest rates of September 2020 led to some very low sub 4% yields being achieved, particularly in the keenly sought-after industrial sector where demand exceeds supply and remains very strong.
Lease trends and rent review mechanisms are becoming a focus as interest rates rise and inflation becomes a concern. Landlords and tenants are seeking to position themselves to either ensure growth or limit it. The most common reviews over the last few years have been fixed increases of around 2 to 3 percent annually with market reviews mid-term or at renewal. Many landlords are now seeking to link increases to CPI with more regular review intervals whilst concerned tenants are trying for capped limits on increases.
Funding has become more difficult to obtain as traditional lenders take a more cautious and conservative approach to investigating details, reviewing valuations and stress testing applicants in the event of changing conditions. The coming market may favour investors with a lower reliance on debt especially those who can act quickly when good opportunities arise.
Demand for industrial premises remains extremely strong with vacancy levels hovering at an all-time low of around only 1% to 2%. Fueling this demand in part has been the growth of e-commerce warehousing and distribution facilities, and the rising costs of fuel and delays associated with logistics and freight.
Leasing enquiry and activity have surged with many landlords experiencing multiple offers from tenants. This, together with inflation impacting on higher costs, particularly for new builds, is expected to put upward pressure on the rentals, and with this, rentals for existing premises are expected to increase and close the gap.
Construction costs for new builds have soared as supply chain factors and labour shortages combined with a lack of suitably zoned land, all culminating in further pressure on rentals. Rentals for well-located new high stud warehousing are expected to move from $165 to $175/m² and could nudge closer to $190 to $200/m².
Cold storage facilities are especially in high demand as New Zealand’s food exports grow rapidly. Similarly, data centres and land to develop these are keenly sought and this sector is seen as offering huge growth potential attracting strong offshore interest.
Although one of the hardest hit during the pandemic, there has been a lift in leasing enquiry as businesses, including some of our Australian neighbours, revisit their plans and get on with expansion or repositioning.
Auckland retailers are having to adjust to new consumer behaviour and preferences for online and in-store experiences change.
Vacancy levels across Auckland remain high in strip shop locations as customers continue to favour malls. The exception being quality, well-located, high-profile sites are still in good demand.
Landlords with older, poorly presented, vacant shops are having to meet the market, particularly where extended vacancy periods are common and the level of incentives on offer is increasing.
Investor demand for retail is also strong for quality properties with long WALTs and tenants offering bankable covenants.
The post-pandemic office market has seen many businesses encourage employees to return to the office, in either a hybrid or full-time model, as remote working from home loses favour.
Both owner-occupier enquiries and leasing activity has picked up with many businesses reviewing their space requirements and also taking the opportunity to upgrade to better quality premises.
The desire to provide better quality workspaces to attract and retain staff is both a local and international trend, and offices that offer superior amenities such as innovation spaces, ergonomic furniture, casual relaxing areas, full kitchens and gyms which add up to create superior workspaces are finding favour.
As with retail investments, buyers in the office sector are focused on tenant strength, lease terms and prospects for rental growth. Quality modern properties in popular locations remain sought after and yields for these hover in the 5.5% to 6.5% range.
Despite uncertain economic and geopolitical times, commercial real estate has historically provided a hedge against inflation. We see good quality commercial and industrial property In New Zealand’s largest city remains highly sought after, and as always it will be a matter of thorough research prior to any decision.
Fortune favours the bold and for those prepared to get off the fence and take action opportunities and rewards will come.