As we settle into a post-Covid business environment, we take the chance to reflect on the commercial property market. We hope you find these insights helpful, especially if you are weighing up the merits of investing or are simply curious about what it could mean for your existing portfolio. Please reach out if you would like to discuss anything further; we are here to help.
INDUSTRIAL – current mood: Busy 😅
Right now, the speed and demand for industrial stock is fast but not always pretty. The competition for quality stock is intense. As an example, last week an industrial unit in Rosedale, Auckland, was listed on Trade Me on a Tuesday, with two offers submitted by Thursday. As part of our ongoing search for investment opportunities, we organised an inspection on Friday. We found several factors were letting the property down – poor parking access, a dark warehouse with an awkward layout, tired offices and no formal lease in place. On further consideration we decided this property did not fit our criteria. However, by Friday afternoon the agent called to say it had sold unconditionally – leaving no time for the new owner to review a LIM, Body Corporate minutes and other finer details. The property sold for close to a 4.11% yield – gosh!
While the speed of the market is feverish, it’s important to point out that because of our relationship with commercial real estate agents, Viranda can access deals off-market and avoid this frenzy. We act directly for our clients and rigorously explore yield, property value, lease arrangements, body corp issues and so on. Once we have something under contract, we have protected our clients from other people coming in and creating a price bidding war, or being pushed into an unconditional agreement without robust due diligence. The environment is competitive, but it’s still crucial to buy well for the future return – rushing and purchasing a poor quality building can end badly.
Finally, a quick comment on the overall industrial market is that it continues to be the stellar asset with ongoing yields of around 4 – 5 percent across the nation. The rebound in confidence post Covid-19 happened at a staggering pace, and now the dynamics of demand and dwindling supply are continuing to fuel the results.
OFFICE – current mood: Hopeful 😊
Post-covid, the workplace environment has changed forever, especially the tourism sector and international student sector. These changes have made office occupiers reconsider their current and future space requirements. As people look to shrink their occupancy costs we are seeing an emergence of shadow-space (i.e. currently occupied but still being marketed for lease) and sub-leasing occur.
For many, sub-leasing is more appealing than exiting a space or relocating to smaller premises. With increased office stock due to enter the market, we believe these strategies will put pressures on rent due to availability levels. But we continue to facilitate an open-dialogue between landlords and occupiers to arrive at a workable solution.
Since Covid-19, vacancy levels have slightly increased in the Auckland CBD office market and across all fringe areas according to our real estate contacts. The drivers for this are increased office stock levels (several large scale developments have been completed), tenants going out of business, downsizing or changing operating models to allow remote working.
It is anticipated that office vacancy space in quality buildings will stabilise as the year continues, especially if our borders reopen to expats, immigrants and international students.
“Viranda tenanted three small offices last year on the North Shore – so absolutely, deals are still being done in terms of leases and transactions. Recovery feels slow but steady into 2022. As expected, offices where support has been shown by the owners throughout Covid-19 has resulted in loyal and stable tenants.” Peter Hemmingsen, Senior Asset Manager.
Finally, in the post-pandemic environment rental renewal incentives are being pushed harder e.g. a recent 5 year renewal negotiated a 9 month rent free period.
RETAIL – current mood: Subdued 😐
Household incomes have dropped and lockdown rounds have taken their toll on bottom lines. According to our retail agent specialists, Auckland vacancy rates have continued to trend upwards over the second half of 2020, reaching 4.5% in December (up from 3.3% just 12-months earlier). From a development front, activity is low and a direct side effect of Covid-19 and changing consumer habits. We have witnessed fantastic examples of retailers having a flexible mindset and changing tact quickly, with strategies like refurbishment to draw people back in. CBD rental rates are facing downward pressure but the opening of Commercial Bay has raised the bar at the high end of the market.
Regardless, high calibre tenants in good locations are continuing to attract investor interest. Consumer spending has also been bolstered of late by the fact we are not taking overseas trips and spending more time at home has piqued interest in DIY materials. Average yields for Auckland prime CBD appear to be 5-6 percent and for Auckland regional centres, 5.5-6.5 percent.*
* data provided on Dec 2020 figures, based on averages across all Auckland precincts.
Commercial property investment is all about people, and while this pandemic has revealed its vulnerabilities and limitations, it has also highlighted the industry’s incredible ability to weather any storm. Every day, our team is exploring new opportunities for clients to capitalise on the recovery. While for others, we are re-prioritising risk, securing income and keeping great tenants.
If you would like to find out more about investing in the current climate, we would be delighted to help.
It’s an exciting time to get involved!