Commercial outlook for 2024
Although business sentiment has lifted and there’s hope that economic fundamentals could improve this year, reality continues to bite across all property sectors and affect consumer spending decisions said a leading economist in Bayleys’ latest Total Property portfolio.
Cameron Bagrie, chief economist with consultancy firm Bagrie Economics, said that the new coalition government has an uphill battle ahead and cautioned “hope is not a strategy to rely on – we need to see substance” when commenting on the country’s growth and productivity outlook.
“New Zealand – not just the government – is facing a major repair job. The good news is that tough times can often bring bold and better decisions and an example is local authorities that have finally woken up to reality and taken steps to remedy structural weaknesses.”
Bagrie said New Zealand’s inflation rate is slowing down, but stressed that although the December quarterly inflation rate of 4.7% was the lowest seen since June 2021, it is still more than twice that of the midpoint of the Reserve Bank of New Zealand’s (RBNZ) annual target range between 1% and 3%.
“The slow pace at which core inflation is waning has the central bank nervous.
“The longer it is away from the inflation target, the more potential for pricing behaviour to settle higher. If that happened, the central bank would need to restore its inflation credibility and that will mean higher interest rates and further hits to the economy.”
He added that getting inflation back to that 2% midpoint is not being helped by geopolitical influences that are disrupting supply chains, and adding to costs, or New Zealand’s infrastructural deficits which are now holding back productivity.
Bagrie said commercial property sales volumes “tanked” in 2023 because sellers and buyers hit an impasse, but expects to see vendors actively revisit price expectations as this year unfolds –particularly as banks are tightening their lending books.
“Although still relatively low, the percentage of non-performing commercial loans has risen rapidly to one percent of all commercial loans, and banks are likely to ‘encourage’ some divestment.
“That will support more deals, but those deals will need to be priced right for the bank to finance them.
“Banks cannot shrink their balance sheets to success so as the market becomes balanced and buyers and vendors align, the credit wheels will turn.”
Bayleys national director commercial and industrial, Ryan Johnson said despite sticky inflation and interest rates, the firm’s transaction volumes rose considerably in the last quarter across asset classes and price bands.
“This shows that the previously gaping bidask spread has narrowed with vendors bowing more to buyers.
“In 2023 we saw a number of managed work-outs as lenders took a red pen to debt levels and took steps to secure collateral from exposed clients.
“While it’s too early in the piece to know exactly how 2024 will play out on this front, the banks are likely to be leaning on over-leveraged landlords to take action.”
Johnson says typically, Auckland has led the rest of the country in terms of an uplift in both transaction volumes and listing activity, with other main centres following in its wake.
“Hamilton, Tauranga, Wellington and Christchurch are expected to see a further pick-up in activity and opportunity. In recent weeks, our Hamilton office had strong bidding on 13 of 14 properties, with 10 sold under the hammer and negotiations on three others.
“Wellington is an interesting one as the office market could be in for some significant rationalisation due to signalled public sector staffing and budgetary cuts which could lead to more stock for sale, along with more sublease space and office vacancy.
“Across the country, leasing activity has been strong off the back of rising net migration numbers with small-to-medium businesses demonstrating confidence by signing leases. However, there’s some evidence that the wider industrial sector is feeling some downward pressure off the back of a slowing economy, dwindling retail spend, less need to stockpile inventory, and deflation of the economy in China.”
Across market segments, Johnson said secondary assets ripe for redevelopment or refurbishment provide the best opportunity in the sector right now, given that new supply still has feasibility roadblocks, including lending challenges.
Bayleys head of insights, data and consulting, Chris Farhi said results of a Q4 2023 sentiment survey across the agency’s nationwide salesforce showed its commercial and industrial salespeople expect a mixed bag of activity in 2024.
“Given that changes in the market take time to show up in the actual sales data, tapping into the views of brokers and their take on the occupier and landlord market gives us an early sense of what is changing, and helps our salesforce to confidently inform buyers and sellers about prevailing market conditions.
“While it’s encouraging to see generally improving sentiment and activity in the residential sector, the commercial and industrial sector continues to have challenges with a level of disconnect between sellers and buyers.
“There are good opportunities on the buying side with history showing that now could be an opportune time in the real estate cycle to purchase.”
The survey also showed that commercial and industrial occupiers were largely looking for better quality premises, in better locations and with a bigger footprint – quashing the idea that businesses are wholesale downsizing and retrenching.
“Occupiers are being more selective about the premises they commit to and they’re more educated on sustainability matters,” said Farhi.
“The real cost to landlords of not undertaking refurbishments and upgrades is extended vacancy and with lenders striving to keep debt balance sheets favourable, this year could be crunch time for some building owners.”