Market robust but credit issues impacting
Auckland’s industrial market continues to exhibit firm underlying market fundamentals. Photo / Supplied
Ongoing growth in Auckland’s economy continues to drive the region’s commercial and industrial property markets but the availability of credit is starting to impact on some potential purchasers limiting an ability to leverage deals, says John Urlich, manager of Barfoot & Thompson Commercial.
Quoting an independent property report prepared for his agency entitled Auckland Property Market Commentary, Urlich says that, on the positive side, “robust market fundamentals combined with low interest rates have helped maintain investor demand for properties.
“The growth outlook remains positive and will, in the short term, support continued growth in Auckland’s commercial and industrial property markets.”
Urlich says there is still vigorous competition for modern well leased commercial buildings from a range of investors and the volume of sales remains strong, but a lack of good quality stock for sale is limiting the volume of sales activity. “Current low interest rates are continuing to support investor demand although anecdotal evidence suggests banks are starting to ration credit. “Expectations of future increases in interest rates may also impact on the market.”
The report cited by Urlich says an additional 32,600 workers have been employed in typical office businesses over the last five years.
“This has increased the demand for office space and resulted in net absorption of 123,000sq m in the CBD and 114,000sq m in the metropolitan market over the last five years.
“Growth in demand combined with low vacancy rates has meant tenants increasingly have had to consider B-grade space due to a lack of vacant supply in prime and A-grade buildings or alternatively consider fringe city locations.
“The supply side of the market has started to respond to market pressures with increasing construction activity has increased as developers look to take advantage of the low CBD vacancy rates and ongoing rental growth.
“Investor demand for superior quality stock remains high and there is now 82,000sq m of office space under construction in the CBD and a further 73,000sq m under construction outside the CBD. Once completed these buildings will place upward pressure on vacancy rates.”
Urlich says the Auckland industrial market continues to exhibit firm underlying market fundamentals with increasing demand, low vacancy rates, increased rents, and keen investor demand. “However, some market drivers are starting to change. Anecdotal evidence suggests banks are rationing credit to developers which is impacting on their ability to respond to demand. “Land values remain elevated and, combined with growth in construction costs, make it is difficult for developers to create the additional space required.”
He says these are typical characteristics of a late cycle upswing in market activity. “The implications of the Unitary Plan are still flowing through into the market with commercial and industrial occupiers now having to compete for buildings with residential developers in areas which have been rezoned Mixed Use.
“Landlords are now preferring to offer shorter term leases to position themselves so they can take advantage of any future redevelopment opportunities. Consequently, an increasing number of tenants are looking for owner-occupier styled opportunities so they can secure premises for their business in the medium to long term.”
Urlich says retail property continues to experience a steady demand for space with limited space available for lease in prime locations. “Ongoing population growth, driven by historically high levels of net overseas migration gains, combined with low interest rates and increased house prices should continue to support retail sales growth although this is unevenly distributed across different store types.
“Consumer confidence in Auckland remains strong supporting growth in retail sales and investor appetite for retail investments has continue to outstrip supply of properties available for sale as yields continue to firm.”
John Urlich, Barfoot & Thompson Commercial.