Industrial drought affecting tenants and purchasers

3:57 PM Thursday July 7, 2016 True Commercial

Tenants are struggling to find suitable industrial premises to work from.

A critical lack of industrial premises in some locations around the country is having significant impacts on tenants and purchasers, says a report by Colliers International.

Tenants searching for new or larger space are struggling to find suitable premises to work from while purchasers are struggling to find good stock to buy, says Colliers’ latest New Zealand Industrial Report.

Chris Dibble, Colliers director of Research and Consulting, says these factors are leading to further decreases in vacancy, increases in rents and yields firming to new record lows.

“Developers have upped the ante, but they too are experiencing constraints in terms of land availability, pricing and suitable infrastructure, as well as increasing material and labour costs.

Colliers national director of industrial sales and leasing, Greg Goldfinch says the message is tenants and purchasers are having to ‘meet the market’ — especially in areas of very low supply like parts of Auckland.

“The key characteristic at the moment is that the industrial sector is enjoying a positive period of economic growth and is expanding. Investors will view this positively. The growing number of ‘yield hungry’ investors motivated by market sentiment in a low debt cost environment is another driver for the industrial sector’s well-founded optimism.”

Sam Staite, director of industrial sales and leasing in Christchurch, says the focus for tenants remains on leasing quality and new stock in popular locations. “Similar to other locations nationally, there is a sizeable number of investors and owner-occupiers looking to secure stock. Given the transition the occupier market is likely to experience over the short-term, the focus for many investors is on tenanted properties. Well covenanted investment stock will often reach low 6 per cent yields, as investors compete for returns in a low interest rate environment.”

The current outlook is more of the same for the industrial market nationwide for the next year. Collier’s report says little relief is forecast for new entrants who won’t meet the market’s new pricing levels. It highlights the key national trends likely to play out in the industrial market over the next 12 months, as follows:

Economic growth continues to support the expansion of the industrial sector. Businesses are optimistic in future orders, production, output and are also realistic in their employment intentions. As tenant demand intensifies, vacancy rates will reduce further.

 In the main centres, capacity may become an issue as the pace of construction activity is not sufficient to keep up with demand, particularly in Auckland. This will keep rents rising steadily, but likely below 3 per cent per annum.

• Wellington’s pace of absorption may slow over the next 12 months due to reducing supply rather than decreasing demand. Tenants are finding it increasingly difficult to locate suitable space to lease, so rents will rise — possibly at higher rates than in the past 12 months.

• Christchurch’s market is likely to enter a period of change as demand pressures reduce fractionally after a continued period of significant demand. Rents are likely to remain broadly in line with current rates, albeit around 20 per cent and 30 per cent above pre-earthquake rates.

• Hamilton’s recent boost to leasing activity reduced vacancy rates and kept the pressure on investor’s when bidding for prime space. Land supply remains a vital component of the sector’s health with recent uptake by the Ports of Auckland generating opportunities for others.

• Limited leasing availability in Tauranga’s industrial market continues to keep market conditions tight. Tauriko is a hotspot of activity, signalling that well-serviced land supply is a key factor to alleviate demand pressures, especially for the continuation of the building sector and ports and logistics sector. Investor appetite remains high, with 5 per cent yields a more common occurrence.

• The gap between prime and secondary property performance in Dunedin continues to increase. Tenants and investors are focused on quality, lower maintenance costs and space efficiency. Several strongly performing local and national businesses are undertaking major industrial development projects. Competition from purchasers remains strong supported by attractive debt costs to yield gaps.

• Interest rates remain low, encouraging private investors, syndicators, unlisted and listed property vehicles to remain active in the most traded commercial property sector in New Zealand. A shortage of stock and high levels of competition in the hotspots of recent years have boosted activity for the likes of Wellington, Hamilton and Dunedin which have not experienced the same levels of yield appreciation in recent years.