Commercial Property Market Outperforming Expectations

Commercial office, retail and industrial markets, one year on from the end of New Zealand’s national lockdown, have performed more strongly than expected, according to a recent research report by Colliers.

The report notes that the effect of lockdowns on the commercial property sectors, both locally and internationally, however, has varied across market sectors.

Chris Dibble, head of research at Colliers, notes that property sector demand has responded positively as a result of the unprecedented amount of stimulus from the Government and the Reserve Bank.

“The generally positive outlook for the economy, prospects of ongoing low interest rates and a growing belief that the worst of the disruption caused by COVID-19 is now behind us has meant occupier and investor sentiment has improved over recent months.

“But demand across the sectors varies, most notably when it comes to the industrial sector, which has had a stellar run.

“The industrial sector has proved resilient in the face of the COVID-19 pandemic, well-illustrated by vacancy rates which have remained at low levels. In Auckland, industrial vacancy rates sit at just 2.2%, while in Wellington the rate is only slightly higher at 2.4%.

“Tenant demand within the industrial sector is being strongly underpinned by growth within a number of occupier sectors, particularly warehousing, logistics and construction,” says Dibble.

The research findings also show an increase in investor competition for a limited number of assets has resulted in further yield compression, and in turn, an increase in capital values and total returns.

“Prime industrial assets in the Auckland market are currently transacting at yields of between 3.8% and 4.5%. In Wellington, yields have also tracked down with prime properties commanding yields of between 4.25% and 6%,” says Dibble.

On discussing retail sector trends, Ian Little, Associate Director of Research at Colliers points out the large format retail sector is also in favour.

“As with the industrial sector, large format retail premises have attracted high levels of investor interest given that they share many of the strong defensive fundamentals.

“Tenant demand has been strong, underpinned by a surge in consumer spending following the national lockdown. This is reflected in vacancy rates of just 1% across Auckland.

“As with the industrial sector, heightened competition has driven yield compression, forcing up capital values. Prime assets are regularly commanding yields of between 4% and 5% across multiple locations while sales of premium assets have seen initial yields of sub-4%, says Little.

But not all sectors of retail are experiencing the same levels of positivity.

“While large format retail property has continued to experience high levels of both tenant and investor demand, other sub-sectors of the retail market face a more challenging environment,” says Little.

“COVID-19 has brought the fragilities in the retail sector front and centre, hastening the inevitabilities for some retailers faced with low consumer spending and changing shopping habits with online retailers increasing competitive pressures.

“The strip retail sector has seen the greatest increase in vacancy rates. Across Auckland the vacancy rate closed 2020 at 8.5% up from 5.3% a year earlier with suburban markets the major contributor with 8.9% of stock vacant. In Wellington, the figure increased from 3.8% to 7.8% over the course of 2020.

“Yields for retail assets, outside of the large format sector, have therefore softened over the last year. This repricing has led to an increase in interest, from some experienced investors, for assets that are well positioned to prosper over the longer term as the economy rebounds.

The report also provides a review of Auckland office sector conditions, with a flight to quality trend apparent.

Little says: “Vacancy rates across both CBD and metropolitan office markets have lifted from historically low levels over the last 18 months, reflecting a combination of increases in new supply, the economic impact of COVID-19 and changing work habits.

“This has presented tenants with a greater number of occupational options than have been available for a number of years, many in prime graded buildings and locations.

“Within the Auckland CBD, demand has migrated north, to the CBD core and waterfront precincts, accelerating a trend apparent for decades.

“Within the Auckland fringe office market, premium locations within Newmarket, Parnell and Ponsonby have attracted the greatest proportion of tenant inquiry.

“Cognisant of the dynamics in play, investors are shaping their investment strategy accordingly,” says Little.

In Wellington, the fortunes of the office market underpinned by government occupation is experiencing different trends.

Dibble says: “The approximate 35% of government occupied office space in Wellington and a positive private sector has supported market conditions in Wellington.

“Although the overall Wellington CBD office vacancy rate increased to 6.9% in December 2020, the movement over June 2020 was limited, up only 45 basis points and remains well below the 20-year average of 9.2%.

“Conditions at the prime end of the market remain particularly tight with vacancy at just 1%. This has strongly incentivised ongoing development with Precinct Properties, Newcrest and Willis Bond progressing significant schemes.

“The purchase of 20 Customhouse Quay by Stride in late 2020, for a 4.5% yield, clearly illustrates the investment demand that there is for prime Wellington located assets.

“The sale has re-rated prime yields in Wellington CBD’s office sector, which will have a massive flow-on effect for other premium assets across the country.”

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