Commercial property primed for 2025 recovery

As we come to the end of 2024, Scott McKenzie, CEO of PMG Funds, shares his outlook and PMG’s journey in navigating an evolving economic landscape.

The commercial property sector is looking primed for recovery as the economic environment begins to stabilise. After a challenging period, lower interest rates and easing inflation are fostering a more optimistic outlook for 2025. Consumer confidence is improving[1], driving increased spending, while businesses are regaining momentum[2] with higher levels of confidence and plans for growth. These factors collectively point to an upswing in the commercial real estate market.

Equity and capital markets, often leading indicators, have started to show signs of recovery, with commercial property expected to follow. While challenges remain, the sector is positioned to benefit from a shift in market dynamics as headwinds ease and tailwinds emerge.

Resilient sectors show strength

Not all industries have experienced the same level of difficulty. Sectors such as professional services, banking, insurance, and large-format retail have weathered the downturn more effectively. Large-format retailers offering value-oriented products, like Kmart and Mitre 10, continue to perform as consumers gravitate toward affordable options during periods of financial constraint.

In contrast, smaller retailers, especially in hospitality and strip shopping areas, have struggled with lower consumer discretionary spending. Similarly, the logistics sector has seen reduced activity due to fewer goods moving across the country. Nevertheless, businesses with robust financial foundations are poised to capitalise on the recovery.

Preparing for growth

Resilient businesses and investors are using the current period to consolidate and prepare for future expansion. Many companies have taken steps to strengthen their balance sheets and position themselves for long-term growth. The demand for high-quality commercial spaces, particularly those with sustainable features, is increasing as businesses refine their growth strategies.

The post-pandemic shift in working habits has stabilised, with most industries finding a balance between remote and in-office work. This has provided greater certainty around space requirements, enabling companies to focus on securing the right environments to support their operations. High-quality, sustainable properties are becoming a priority as businesses align their real estate strategies with broader organisational goals.

Investor interest reignites

As the official cash rate continues to reduce to a more neutral territory, likely around 3-3.5%, capitalisation rates are expected to recalibrate. This will likely translate into property values starting to rise again. We are also seeing investor activity, which has been somewhat subdued, now slowly picking up, with increasing interest in yield-focused and growth-oriented assets like commercial real estate.

Term deposit rates have been, and are expected to continue trending downwards[3], prompting investors to reallocate capital into higher-yield asset classes. Strategic acquisitions and development opportunities are also beginning to resurface, supported by stronger feasibility assessments and increased confidence in the market. While developments take time to materialise, the planning and groundwork being laid today are vital steps toward a stronger future.

Strategic positioning for success

At PMG, we have strategically positioned ourselves to take advantage of opportunities as the market transitions into a growth phase. By maintaining stronger balance sheets and adopting more conservative loan-to-value ratios, PMG has been able to leverage opportunities presented by the current economic environment. This approach has enabled the successful execution of a number of strategic acquisitions this year. Notable additions include a newly built four-storey base-isolated (seismically strong) office building on Victoria Street in Wellington, reflecting a long-term commitment to the capital’s commercial real estate market, and a large industrial site in South Auckland, with a lease up repositioning strategy within the next 6-12 months, generating improved value.

These moves underscore the importance of maintaining a clear strategy and leveraging opportunities in a shifting market. As the cycle evolves, businesses and investors alike should focus on building robust strategies that align with their long-term objectives.

Capitalising on opportunities

The next growth phase presents an opportunity for both businesses and individuals to position themselves for success. A proactive and forward-looking approach is key to making the most of the upswing. This involves re-evaluating strategies, focusing on high-quality assets, and maintaining a positive outlook despite the challenges of recent years.

The foundation for growth is being laid across the sector, driven by stabilising economic conditions and increasing confidence among businesses and investors. With a strategic focus and the right preparation, we expect the commercial property sector will be poised for recovery and growth in 2025.

Disclaimer: The information in this article is of a general nature and was current as at 25 November 2024. It is not intended to be regulated financial advice for the purpose of the Financial Markets Conduct Act 2013, and does not take your individual circumstances and financial situation into account. PMG does not provide financial advice on whether or not an investment in one of its funds is right for you. Please seek advice from a licensed financial advice provider before making any investment decisions.

[1] ANZ Roy Morgan Consumer Confidence, October 2024

[2] ANZ Business Outlook, October 2024

[3] ASB, Term Deposit Report, 17 October 2024