Businesses hit by lack of land and buildings

5:00 AM Wednesday January 27, 2016 Colin Taylor

It is particularly difficult for Auckland businesses to find space in central industrial areas like Penrose.

The tight industrial property market of the past three years is having a detrimental effect on Auckland businesses, says Dave Arlidge, who has joined Knight Frank as industrial director from CB Richard Ellis.  

“Firms are finding it almost impossible to source new premises or expand their existing on-site operations and are turning to third party logistics companies to store and distribute their products,” Arlidge says.

“The only winners out of a sector being squeezed by land and buildings costs are the warehousing and logistics companies.”

At the local level, industrial vacancy levels over the 11.5 million square metres of available space stands at 1.9 per cent. 

Businesses wanting want a prime or A-grade vacant and ready-to-occupy industrial building have very limited options to choose from across Auckland,” Arlidge says. 

There is little vacancy in B-grade and C-grade properties. “Importers have leased up all the C-grade property, typically regarded as ‘lease proof’ before the latest property boom, and B-grade has become the alternative for companies shut out of the A-grade and premium-grade properties.”

It is particularly difficult for Auckland businesses to find space of between 1000 to 4000 sq m in the city’s core central industrial areas of Penrose and Mt Wellington.

 “Before the recent boom, speculative building provided space for companies wanting to expand. It stopped during the global financial crisis and now land and building costs have pushed speculative building out of the reach of most developers.

“Even if the market turns, it is unlikely the industrial sector will ever get back to speculative building because land values in the core areas are hovering at about $500 per sq m.”

Arlidge says at those prices the only businesses that can afford to build are those that intend owning and occupying the property or the larger developers, such as Auckland Airport, Goodman and James Kirkpatrick Group, which have land banks.

“They continue to build larger distribution facilities on ‘spec’ but these are inevitably leased before completion because of the lack of existing, built options available.” 

He says while there is a further 250,000 sq m either being built or in the planning stages by the larger operators, many businesses remain unaware of the tight market. “Once they start looking for new premises they quickly realise that planning and executing a re-location is a 12 to 18 month exercise and often the only option is to look at a design and build or stay put.  In recent years listed property trusts and high net worth individuals have ended up playing the greatest role in funding new projects - accounting for 65 per cent of development with owner-occupiers responsible for the balance.

“The increase in land prices has allowed development by owner occupiers on the basis of yield compression in the market with industrial property yields sitting at close to 5.8 to 6.2 per cent for prime buildings. Owner occupiers are more than likely to stay on one site for 20 years or more and are not dependant on development margins throughout the design and build process.”

Arlidge still expects the market to turn in the next 12 to 18 months even though opportunities for buying or leasing are the tightest they have ever been.

“We are almost at the end of another property cycle and the current tight supply situation will start loosening over the next year or two.”

He says a number of factors point to a decline in the industrial sector’s performance of the past three years.

“Industrial businesses survive on positive business confidence and interest rates, and the strength of the sector will start to decline if either of these indicators alters too much.  There are already signs business confidence is ‘coming off’.

“Figures from the Chamber of Commerce reveal that weaker dairy prices and the Chinese slowdown have 40 per cent of Auckland’s companies believing business conditions will deteriorate within the next six months. That’s a 37 per cent increase in pessimism from three months previously.”

Arlidge says the slowdown of Australia’s economy – which is New Zealand’s biggest trading partner – is also having an impact.

“Industrial firms relying heavily on Australia for sales say its economy is turbulent because of lower commodities prices, speculation of slower global growth led by China, lower Australian bond yields and narrowing interest rate differentials.”

Leases have also changed. “Rents have risen and leasing incentives such as rent holidays and fit out contributions have reduced drastically”.

Arlidge says the Auckland industrial market is now a landlord’s market. “Landlords want good tenants who will stay in their property for a long lease term. Short term one and two year lease proposals will not meet the market and tenants need to consider this before making a move.  Landlords still want to protect the income sustainability of their assets but the days of buying tenants have gone.

“Now savvy landlords will bring a building back up to as close as new as possible when a tenant moves out to protect their asset and make it easier to re-lease. There has been a move to better quality by tenants and not just to gain efficiency but also to aid in attracting and retaining staff as part of the total image perception of the business.”   

Dave Arlidge, Knight Frank.jpg

Mug shot of Dave Arlidge, industrial director for Knight Frank, who is quoted in the story.