The commercial property sectors to watch in 2021
While the Covid-19 pandemic has caused disruption across New Zealand, the commercial property market has proved resilient on the back of stronger than expected economic performance. So what should investors expect in 2021?
Industrial
Covid-19’s impact on the industrial property sector has been mitigated by a number of factors. Many manufacturing companies were classified as essential and therefore permitted to trade during lockdown, while demand for services such as storage and distribution increased.
Demand fundamentals have been strongly supported by a rapid return to expansion within the manufacturing sector and growth in logistics service providers. The accelerated adoption of online shopping that Covid-19 lockdowns drove has seen a sharp increase in demand for space from the logistics sector. Looking ahead, the roll out of the government's multibillion-dollar infrastructure programme will inject additional demand for industrial workspace.
Despite a slight easing in vacancy rates across Auckland, Wellington and a number of regional centres over recent months, it is likely, given current demand drivers, that vacancy rates are at, or close to peak levels.
This means tight market conditions are likely to return. This has elicited a significant response from the development sector with building consents reaching new record highs in Waikato, Gisborne, Hawke's Bay and Southland.
High levels of development activity have elevated the demand for industrially zoned land which, in many centres, is in short supply. This is resulting in further upward pressure on land values, particularly within established precincts.
Office
Office markets across the country are experiencing a rise in space availability as businesses reflect on the changing economic situation and pivot to new workplace strategies due to Covid-19. However, different market dynamics are evident across the country and more positive economic projections are emerging that could lead to a growing number of positive occupier absorption stories ahead.
In Auckland, the vacancy rate hit
8.8 per cent in December 2020, with prime grade vacancy at 6.8 per cent. In Wellington, where the market is more insulated by the significant government presence, overall vacancy increased from 6.4 per cent to 6.9 per cent over the six months to December
2020, while prime grade vacancy was just 0.6 per cent. In Christchurch, where supply has been more readily available, vacancy within the CBD was 14.9 per cent.
There has been significant new supply added to total office stock across the country in recent years. While Covid-19 deferred the number of previously planned office projects, developers are now dusting off their plans to reignite delivery discussions. However, over the short-term, new development will predominantly be dependent upon tenant commitment being secured.
Retail
The economic backdrop for New Zealand's economy and the confidence provided for consumers to increase their spending levels continue to surprise to the upside. This paints a more positive expectation for 2021 than originally forecast, even at the end of 2020.
While there are still many challenges for the retail sector, the initiatives from the government and the Reserve Bank have provided a support base for New Zealanders. Many retail spending measures showing higher levels of activity at the end of 2020 than at the end of 2019.
Retail sector trends prevalent preCovid-19 have been accelerated, with online spending the primary example. What was originally expected to occur incrementally over time, happened instantly and on an unprecedented scale as more and more New Zealanders were forced online due to lockdowns.
Retailers that are not equipped for a more online world are likely to struggle in the future retail landscape. Large format retail such as supermarkets, which were classed as an essential service, have benefited and the DIY sector is going through a resurgence period as well.
While there are elements of positivity, cautiousness is apparent. Lease agreement conditions and rental payments will remain a significant focus for landlords and tenants moving forward.