Colliers: Market outperforming expectations
Commercial office, retail and industrial markets, one year on from the end of New Zealand’s national lockdown, have performed more strongly than expected, according to a Colliers research report.
The report notes the effect of lockdowns on the commercial property sectors locally and internationally has varied across market sectors.
Chris Dibble, head of research at Colliers, notes that property sector demand has responded positively as a result of the unprecedented amount of stimulus from the Government and the Reserve Bank.
“The generally positive outlook for the economy, prospects of ongoing low interest rates and a growing belief that the worst of the disruption caused by Covid-19 is now behind us has meant occupier and investor sentiment has improved over recent months.
“But demand across the sectors varies, most notably when it comes to the industrial sector, which has had a stellar run.
“The industrial sector has proved resilient in the face of the pandemic, well-illustrated by vacancy rates which have remained at low levels. In Auckland, industrial vacancy rates sit at just 2.2 per cent, while in Wellington the rate is only slightly higher at 2.4 per cent.
“Tenant demand within the industrial sector is being strongly underpinned by growth within a number of occupier sectors, particularly warehousing, logistics and construction,” says Dibble.
The research shows an increase in investor competition for a limited number of assets has resulted in further yield compression, and in turn, an increase in capital values and total returns.
“Prime industrial assets in the Auckland market are currently transacting at yields of between 3.8-4.5 per cent. In Wellington, yields have also tracked down with prime properties commanding yields of between 4.25-6 per cent.”
On retail trends, Ian Little, associate director of research at Colliers, points out the large format sector is also in favour. “As with the industrial sector, large format retail premises have attracted high levels of investor interest given that they share many of the strong defensive fundamentals.
“Tenant demand has been strong, underpinned by a surge in consumer spending following the national lockdown. This is reflected in vacancy rates of just 1 per cent across Auckland.
“As with the industrial sector, heightened competition has driven yield compression, forcing up capital values. Prime assets are regularly commanding yields of between 4-5 per cent across multiple locations while sales of premium assets have seen initial yields of sub-4 per cent.”
Not all retail sectors are experiencing the same positivity. “While large-format retail property has continued to experience high levels of both tenant and investor demand, other sub-sectors of the retail market face a more challenging environment,” says Little.
“Covid-19 has brought the fragilities in the retail sector front and centre, hastening the inevitabilities for some retailers faced with low consumer spending and changing shopping habits with online retailers increasing competitive pressures.
“The strip retail sector has seen the greatest increase in vacancy rates. Across Auckland the vacancy rate closed 2020 at 8.5 per cent, up from 5.3 per cent a year earlier, with suburban markets the major contributor. In Wellington, the figure increased from 3.8 per cent to 7.8 per cent over the course of 2020.”
The report also provides a review of Auckland office sector conditions. Little says: “Vacancy rates across both CBD and metropolitan office markets have lifted from historically low levels over the last 18 months, reflecting a combination of increases in new supply, the economic impact of COVID-19 and changing work habits.
“In the Auckland CBD demand has migrated north to the CBD core and waterfront, accelerating a trend apparent for decades. Within the Auckland fringe office market, premium locations within Newmarket, Parnell and Ponsonby have attracted the greatest proportion of tenant inquiry.”
Of Wellington, Dibble says: “The approximate 35 per cent of government occupied office space in Wellington and a positive private sector has supported market conditions in Wellington. Although the overall Wellington CBD office vacancy rate increased to 6.9 per cent in December 2020, the movement over June 2020 was limited and remains well below the 20-year average of 9.2 per cent.”