Speculative Building Makes a Come Back

Speculative Building Makes a Come Back

Due to a rapidly diminishing and limited supply of affordable primary stock, (A grade industrial); it seems developers are now looking at spec-build projects for tenants in the Auckland market.

According to Jones Lang LaSalle Industrial research, after the GFC, the Auckland industrial market saw vacancy rates rise with overall vacancy peaking at 8.4% in December 2009. As markets recovered vacancy has since fallen steadily to sit at 5% in December 2012 which is more or less the tipping point for increased activity in the industrial market. Overall tenant demand is positive although at the early stage of the cycle in terms of uplift. Despite this there is enough demand pressure at a 5% vacancy level to make things quite tight in prime precincts.

Increasingly however, developers are finding that tenants are often unable or unwilling to commit to future occupation of new build premises with all of the associated unknowns inherent in a design build. In addition it is often difficult for tenants – who are not involved in property on a day-to-day basis - to visualise what a new property can do for their business. As such, developers need to commit to building a finished product such that tenants are able commit at or near completion.

Sam Smith, Director of Industrial Sales and Leasing at Jones Lang LaSalle, says, “We are seeing that due to the changing industrial market a few select developers are deciding to build speculative warehouse / office developments in the South Auckland region due to the changing nature of tenant demands.”
Mr Smith adds, “Over the last six months we have witnessed Auckland Airport develop two uncommitted developments. One is a high-stud 3320sqm industrial building with additional land for expansion on the corner of Landing Drive and Airpark Drive which has now been leased after completion to Spaziocasa.”
Sean Leonard, Property Development Manager for Auckland Airport, says, “We have established a speculative development strategy to take advantage of low vacancy, relatively low levels of construction activity and specific market segments that have either very low levels of vacancy or are poorly serviced. The initiative to date has been highly successful with 75% of the 12,000sqm speculative industrial space committed within 5 months of completion. A further 3,420sqm standalone industrial building is currently being developed with completion scheduled for early 2014.

Mr Smith continues, “Private investors Quadrant Properties - who are currently looking at speculative building a 1,500 sqm warehouse with 200 sqm of associated office space located in Mt Wellington – are a further example of developers committed to create new speculative buildings throughout the South Auckland region. Although, tenant demand for buildings remains relatively flat indicating that the overall demand for new space is moderate. Within the tenant base however there remains a significant number of tenants that would be prepared to upgrade to new premises if the market opportunity was available.

Justin Kean, Director of Research and Capital Markets, concludes, “There have also been several cases of tenants purchasing the property that they occupy. This is often a capital allocation decision with business owners seeing it as a chance to make a passive investment that is also strategic for their property. With businesses able to borrow circa 5% and with industrial yields at 8% there is a clear arbitrage opportunity in rental savings. This is subsequently having the effect of taking stock out of the market which is increasing the requirement for new build stock as alternative sites are simply not available.”

ENDS

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