News and Publications

Commercial Market Comment: May 2019

General Overview

Over the last five years the local commercial property market has maintained a steady level of sales activity. Yields for well located, securely leased properties with a high seismic rating have fallen on the back of historically low interest rates and owner-occupier purchasers are now a significant influencing factor on the market. Sales analysis is now showing a stabilisation of yields across most sectors but with further falls evidenced for smaller properties well suited to owner-occupation. Financiers and investors remain keenly interested in weighted average lease terms and seismic rating in considering the risk profile of any property.

Graph May 2019

The Reserve Bank (RBNZ) continues to manipulate the Official Cash Rate (OCR) intending to control the market and monitor inflation. With earlier inflation running below 1.00%, the OCR was lowered in November 2016 by 25 basis points to 1.75% with the intention of increasing economic activity and achieving the Reserve Bank’s inflation targets.

The OCR was held at 1.75% from November 2016 until May 2019 when it was reduced by a further 25 basis points to 1.50%.

The CPI (All Groups) index indicates that annual inflation for the March 2019 quarter was 1.50%. This falls towards the lower end of the RBNZ target range of between 1.00% and 3.00%.

Retail Market

In the period following the Global Financial Crisis from 2008 to 2011, rentals stopped any form of growth and fringe retail areas even took a few steps backwards.  There were few new leases and retail tenants were struggling in the economic environment.

From 2011 to 2015, the effects of the Christchurch earthquakes hit hard with massive increases (double to treble) in insurance premiums for older premises.  Many tenants struggled with these increases in outgoings and some landlords are known to have offered relief to their tenants as a result.

From 2016 to date, the retail market has remained flat with relatively high vacancy levels and little evidence of rental increases apart from in prime retail locations.

Retail sales in New Zealand increased 3.30% in the first quarter of 2019 over the same quarter in the previous year. Retail sales year-on-year in New Zealand averaged 3.08% from 1996 until 2019, reaching an all-time high of 9.30% in the first quarter of 2004 and a record low of minus 8.00% in the first quarter of 2009.

Office Market

In the period following the Global Financial Crisis of 2007/08, rentals stopped any form of growth and there were few new leases. Economic conditions were tough and increased vacancy rates were evidenced. Hard on the heels of this the effects of the Christchurch earthquakes of 2010/11 hit hard with massive increases (double to treble in some instances) in insurance premiums payable by tenants.

Over this period and through to around 2014, some landlords were observed to offer rent or outgoings relief to their existing tenants while the limited market demand for office space witnessed several new lease agreements at reduced rental levels.

From 2014 there has been a clear differentiation in behaviour between the older and modern office accommodation markets.  While older office premises have remained difficult to lease and rental levels have been flat, the market for modern earthquake compliant premises has been a lot stronger with increases seen in rental levels on new lettings and rental reviews.

Industrial Market

The industrial rental market was subdued for several years following the Global Financial Crisis of 2007/08, as tenants sought to match their financial situation with their premises. With few exceptions, industrial rentals showed limited growth through to 2014.

From 2014 onwards, vacancy levels fell considerably and there is now a very limited number of industrial premises available for lease on the open market. There has been a notable upsurge in demand for large scale industrial property.

In general, rental rates for well-located light industrial/service commercial premises continue to increase as demand edges ahead of supply. Developers are now also seeking a fair return on escalating development costs, which in turn has led to underlying industrial rents increasing over the past 24 months. Older and somewhat dated premises situated in secondary low-profile industrial locations have not witnessed the same level of rental growth.

Due to the increased demand for modern well-located industrial premises, several new industrial developments have been completed on previously vacant industrial land holdings within the greater Nelson area over the past 24 months.  This has led to a shortage of vacant industrial sections available for sale on the open market.  Our research of recent re-sales of vacant industrial sections has indicated an increase in sale price achieved when compared with the previous sale of the same property.