It's no secret the commercial property sector has seen a softening of yields across all markets recently, to differing degrees across regions, sectors, and even individual properties. Gavin Read, Head of Research at JLL, recently shared his insights into what has driven these changes and what the next few months will look like, specifically through the commercial real estate (CRE) lens.
The recent movement in yields has been driven primarily by the higher interest rate environment the country has experienced since the Reserve Bank of New Zealand (RBNZ) commenced the OCR hiking cycle in October 2021 to manage inflation. However, with the most recent OCR reviews in May and June, the RBNZ indicated that interest rates have peaked. The forecast is that the current OCR of 5.50% is now in a holding pattern through the middle of 2024 when an easing cycle is expected to begin. This should provide cautious optimism that there is light at the end of the interest rate tunnel.
Lower industrial vacancies
Prime industrial vacancies have reached historical lows across the main centres, with vacancies in Auckland at 0.6%, Wellington 1.5%, and Christchurch 1.4%. Demand and supply imbalances continue, with supply unable to keep up with the high occupier demand, especially for sustainable, high-quality spaces in prime locations.
Limited supply of new land and rising construction costs, together with low vacancies, are the main ingredients in the industrial rental growth story we are seeing. This is forecast to continue for the remainder of this year and into 2024. During the first quarter of 2023, we saw annual double-digit prime rental growth in Auckland (14.3%) and Christchurch (16.9%), with more muted growth in Wellington (5.0%).
Flight to quality will persist
The divergence between prime and secondary office space is widening as the ‘flight to quality’ continues from the past two years. Employers are seeking properties that amplify their businesses in the battle to attract and retain top talent. Evidence of this divergence is clearly illustrated by prime office spaces compared to secondary in Auckland CBD, with vacancies at 5.4% for prime, while secondary sits at 16.3%. This is also reflected in the uptake of occupancy, and cost per sqm, for prime offerings across the main centres.
Despite the retail sector having faced its own headwinds in recent times, we have seen rental growth of 2.6% in regional centres for 1Q23. The strongest performer in rental growth has been bulk retail, up 13.8% annually. This supports our forecast from 2022 that bulk retail, including shopping centres, will lead the retail market to close out this year and beyond.
Focus on sustainability
What should be leading all our conversations is sustainability and how the built environment has a significant part to play in moving the dial to achieve our individual and collective net zero goals. This perspective on CRE is a growing trend offshore and is picking up pace in New Zealand.
The importance of embodied carbon in existing CRE, and the idea that demolish/rebuild may not be the best choice for the environment in all developments, are considerations developers are now taking into account.
Opportunities in a challenging environment
It’s easy to concentrate on headwinds such as softening yields, high inflation and interest rates, and the cost of living, however there are positives that can balance these factors. Net migration has rebounded swiftly, and is forecast to be over 100,000 by the end of the year; tourists are back with more upside to normalised levels, and we have very low unemployment across the country.
If you're in the ‘interest rates have peaked’ camp, some of the uncertainty from the start of the year has already been minimised, especially when looking at medium- to longer-term strategies. All signs are pointing to this being the trajectory the country is on, which will bring some much-needed balance back to the economy.
The next few months are sure to be interesting and exciting, bringing continued challenges, but inevitably also opportunities.
Disclaimer: The information in this blog is of a general nature and was current as at Tuesday, 25 July 2023. 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. Please seek advice from a licenced financial advisor before making any investment decisions.
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