Strong Demand For Industrial Space Lifts Rents, But Cost Of Construction A Concern – JLL Market Snapshot

November 2022 – The continued strength of New Zealand’s industrial property sector is reflected in JLL’s latest quarterly market snapshots, released today. Design and build industrial spaces in Manukau and availability of greenfield spaces at attractive prices in Christchurch in particular, continue to be in high demand.

This has seen average rents for prime industrial space lift by 5.8% in South Auckland and 3.8% in Christchurch over the last quarter. There is also plenty of development in the pipeline, with Auckland looking at 630,000 sqm of new industrial space in the next two years and Christchurch an additional 85,000 sqm. Over 75% of this is scheduled for 2023.

According to JLL’s Head of Research Gavin Read, low vacancy and strong yields signal growing confidence in the industrial market, but many are looking at how to mitigate rising construction costs.

“Despite a significant number of developments in the pipeline, cost of construction does remain a concern for developers and owners as they consider design options for new builds and redevelopments.”

Across the office sector, average rents have seen either moderate growth or have stabilised in the last quarter. Strong demand continues in the prime end of the market, especially in Auckland’s CBD as Read says tenants are continuing to seek premium spaces with quality end-of-trip amenities. Prime office rents in Auckland’s CBD now average $543 per sqm, up 4.23% compared to the first quarter of the year.

“The demand from occupiers seeking quality spaces for their staff continues to widen the divergence between prime and secondary asset rents and vacancy rates and this is likely to carry into 2023.”

Read says tough market conditions with rising inflation and interest rates are negatively affecting business confidence and are likely to have an impact on the commercial property sector over the coming months. Another rising influence he points to is an increasing requirement for occupiers to meet environmental, social and governance goals in the coming years as well.

“While there are no regulatory requirements for Green Star and NABERS ratings for commercial real estate currently, observing offshore trends in Australia, the UK, and Europe points to New Zealand adopting its own regulatory framework sometime in the near future.”

Retail vacancy within New Zealand’s main centres also remains challenging with average foot traffic still struggling to return to pre-pandemic levels. Read says interest from major international brands such as Ikea seeking to establish premises in New Zealand as well as the return of cruise ships will be positive for retail in our CBDs as we head into 2023.

“The outlook on retail spending is still likely to be positive as we head into 2023 as high employment remains, but we may see a tightening of spend over the coming months as Kiwis navigate the next few months of rising inflation and interest rates.”

Highlights from the latest snapshots (attached) include:

Office

• Prime rents in Auckland’s CBD continue to increase while secondary rents remain unchanged
• Several high-profile development projects are likely to be completed in 2023 within the CBD, including Precinct Properties’ 1 Queen Street and The Wynard Quarter Innovation Precinct across three buildings.
• Premium office space will continue to drive rental growth coupled with record low vacancies in the capital.
• Due to limited stock availability, prime CBD office rent in Christchurch is expected to increase by 5.3% to $380 per sqm by the end of the year.

Industrial

• 630,000 sqm of industrial space is due for completion in the next two years
• Countdown’s $99million, 11,000sqm distribution centre is due for completion in 2024

Retail

• Overseas interest in retail remains high, indicated by the recent sale of 18 Gull service stations in Auckland and Wellington to ASX-listed REIT Charter Hall Retail for $64.5million
• Manawa Bay, the Auckland Airport premium shopping destination, is due to be completed in 2024 and will feature 100+ stores over 24,000sqm and 1,400 carparks

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