2020 saw increased vacancy rates in the office, industrial and retail markets with mixed yields in each sector, but
Colliers research says it is not all about COVID.
While the adverse economic impact of COVID-19 was a rightfully expected influence, other market dynamics pre-COVID (such
as vacancy rates that were at historic lows and increasing development activity) also played their part.
While the general trend has been upward, the rate of change has differed across market sectors and locations as
illustrated by the results of the latest Auckland and Wellington office, industrial and retail vacancy surveys.Office Vacancy
Auckland CBD’s overall vacancy rate increased from 4.7% to 8.8% between December 2019 and December 2020. In Wellington
the increase in vacancy over the same period has been much more muted, rising from 6.1% to 6.9%. Further increases in
vacancy are projected for 2021 in both centres.
The Wellington market has, to an extent, been insulated from the immediate economic impact of COVID-19 by the high
proportion of government tenancies.
Both centres have experienced significant development activity recently driven by high demand and little supply. Over
2020, the Auckland and Wellington CBD inventory increased by just short of 50,000 sqm (approximately 3.5%) and 45,000
sqm (approximately 3.2%) respectively.
While a number of mooted projects have been put on hold earlier in 2020, confidence is returning about the future. This
is showcased by some project commencements we are aware of that are expected to be announced soon as well as the
marketing by Precinct Properties of their innovation precinct schemes citing occupation dates of Q4 2023. The two
buildings will provide approximately 16,500 sqm of floorspace.
The extent to which flexible working is adopted by occupiers will have a longer-term influence upon vacancy rates.
Flexibility will be a key driver of the market over 2021, needed by staff, tenants and owners.
Sublease options have also increased the availability of high-grade stock, which has been in short supply, this has seen
a number of companies taking the opportunity to upgrade their accommodation. Therefore, future increases in vacancy will
predominantly be within the secondary market with prime property continuing to enjoy better demand.Industrial Vacancy
Industrial vacancy rates edged up from historic lows in both Auckland and Wellington over the course of the year. In the
Auckland region, the overall vacancy rate climbed from 1.7% to 2.1% in the year to August 2020. In Wellington, vacancy
reached 2.4% in November 2020 up from 0.9% a year earlier.
In both centres the level of inventory increased; by around 125,000 sqm and 20,000 sqm in Auckland and Wellington
respectively. However, it is likely that the upward trend in vacancy is close to, or already at its end.
The rapid rebound in the economy, growth in online retailing, a booming construction sector and the prospect of massive
government expenditure on infrastructure projects is fuelling tenant demand for industrial workspace.Retail Vacancy
The COVID-19 pandemic has both accelerated changes in the retail market that were already apparent and created
additional head winds. Chief amongst the latter being lockdowns and border closures which have halted the arrival of
overseas tourists and international students.
Vacancy rates have increased in both Wellington and Auckland. In the former case rising from 6.7% to 7.6% over the year
to December 2020. Over the same period, Auckland’s rate increased from 3.8% to 4.5%.
Increases would no doubt have been higher had it not been for the support measures introduced by the government and
Reserve Bank.
Support to the sector has emerged through an increase in spending over the closing months of 2020 with electronic card
spending over the final quarter of 2020 up $816 million from a year earlier.
Further, not all retail property sectors are feeling the same challenges, and investors are starting to search for
opportunities. A noticeable rise in investor demand for large format retail premises is one example.
There is also growing support for prime shopping centres which have, in many instances, gone through a pricing
correction over 2020.Office Yields
Over the first half of 2020, office yields in Auckland and Wellington held relatively stable, softening only an average
25 basis points before firming in the latter half of the year.
The better than expected economic performance and sustained government support contributed to a resurgence in investment
confidence.
Demand for investments with stable and reliable income streams coupled with a low interest rate environment saw new
record low yields being achieved. Precinct Properties announced the sale of it’s remaining 50% share in ANZ Centre at 23
Albert Street, Auckland for $177 million, representing a yield around 5%.
The limited ability to travel globally provided onshore investors the opportunity to secure quality graded assets with
limited offshore competition. In the capital, the premium grade Deloitte House at 20 Customhouse Quay transacted for
$220 million to NZX listed Stride Property at a yield of 4.5%, a record low for Wellington.Industrial Yields
After the usual brief contraction throughout the December holiday period, manufacturing activities in New Zealand kicked
off the new year with a strong start.
The BNZ – Business Performance of Manufacturing Index (PMI) recorded an index of 57.5 in January 2021. (A PMI reading
above 50.0 indicates that manufacturing is expanding; below 50.0 represents that it is contracting). This was an
increase of 9.2 points compared to the 48.3 registered in December 2020, and 9.6 points ahead when compared to the same
month last year.
The index has now recorded expansion in seven of the last eight months. New Orders increased the largest from Dec-20 to
Jan-21 recording a score of 62.4, whilst Employment reached 55.4, the highest since 2017.
Manufacturing under the broader category of goods-producing industries, accounts for approximately 20% of New Zealand’s
GDP. In the September 2020, the goods-producing industry rose 26% from the previous quarter, driven largely by increases
in construction and manufacturing.Retail Yields
Despite the on-going global pandemic, total actual retail sales values in the 2020 year increased by 4.9%, approximately
$1.3 billion in additional spend compared to the 2019 year.
The December 2020 quarter saw its usual growth trajectory, up 5.3% when compared to the same quarter the previous year
and ahead of the 4.0% growth between December 2018 and December 2019.
11 of the 13 core industries recorded growth compared to the same quarter last year with electrical and electronic goods
increasing the most at 19%, followed by non-store and commission based retailing, hardware, building and garden
supplies.
Growth in these industries were bolstered by the strong housing market which has encouraged home improvements and
upgrades.
Increased adoption of online retailing is also evident with nonstore and commission based retailing recording 18% growth
and is one of three sectors to have sustained consecutive positive quarter on quarter growth over 2020.Syndicated property retains its appeal
The lower for longer interest rate environment drove a lift in syndication activity in 2020 despite the disruption to
the economy caused by the COVID-19 pandemic.
While this disruption caused a number of schemes to be withdrawn, demand for offerings brought to market saw the total
value of funds raised via syndicated property, over the course of 2020, surpassing $525 million.
Over the course of 2020, approximately 25 syndicated property schemes were successfully offered to investors, a
combination of single asset offerings and multi-property funds (excludes private syndications).
The total value of funds raised across the offerings was just over $525 million, ahead of the previous high of
approximately $485 million raised in 2018 and approximately $100 million more than the total recorded in 2019.
The total would have been higher had it not been for the disruption caused by the COVID-19 pandemic which saw a number
of offerings withdrawn. These offerings, which included large scale tourism and retail property assets, would have
looked to raise just under $300 million.
Given the economic uncertainty that the COVID-19 pandemic has introduced, investors within the syndicated property
sector have placed an increased priority on security of tenure and surety of return. As a result, syndication companies
have looked to provide investors with low risk options by prioritising factors such as property sector, location and
tenant covenant.
The industrial and bulk retail sectors have been favoured asset classes over the year, accounting for approximately 30%
of funds raised when the industrial element of mixed property portfolios is taken into account.
Both sectors offer strong defensive fundamentals. Supermarkets, classified as an essential business, were able to trade
through all restriction levels. Retail spending in DIY and electrical goods stores lifted sharply over the second half
of 2020.
Industrial vacancy rates have held at low levels as tenant demand has been underpinned by growth in occupier sectors
such as online retailing and construction.
Office assets which have been brought to market have benefitted from strong tenant covenant anchored by
government or blue chip international or national companies.
Approximately 55% of funds have been raised for assets located within the commercial property market’s golden triangle
of Auckland, Waikato and the Bay of Plenty. A further 15% of assets were located within Wellington.Looking ahead
With low interest rates likely to persist for an extended period, the search for higher returns is likely to drive
ongoing interest in syndicated property offerings.
A fast start has been made to 2021. Oyster Property has brought an expansion to its industrial fund to market, Mackersy
Property is marketing an industrial portfolio while Centuria (Augusta) launched its Visy Glass occupied industrial
offering.
These, along with other proposed schemes currently being prepared for launch soon, will see 2020’s momentum being
maintained in 2021.OfficeDespite rising vacancy rates and some occupier absorption caution in the office sector due to the rise in remote
working, an active development sector is forecast over the next five years. Supporting some of the optimism is the
economic and business performance outlooks.One measure to keep an eye on is the recent changes in the number of filled jobs reported by StatsNZ. It is still early
days, and overall growth rates are still below COVID-19 levels, but some trends that show office occupier demand
returning are appearing.IndustrialStrong leasing market fundamentals, which have seen vacancy rates holding at low levels and upward pressure on rentals,
have underpinned the positive sentiment towards the industrial sector amongst investors.The results of the latest Colliers investor sentiment survey found that investor confidence across the country was a net
positive 45% (optimists minus pessimists). The Auckland market generated the most positive sentiment with a net 54% of
investors expecting rental and capital values to climb. The capital’s industrial sector was not far behind at a net
positive 49%. Given current market conditions, we may see these numbers rise further over 2021.RetailThere have been some clear winners in the retail sector after a challenging 2020. Latest data released by StatsNZ
indicated core retail card spending in December 2020 totalled $6.68 billion, an increase of $1.14 billion from the
previous month and 4.8% higher than December 2019.Consumable and durables recorded the biggest spending increase as Kiwi’s spent up strongly in liquor, supermarket and
grocery stores.A new milestone was also recorded with spending on food and beverage services surpassing the $1 billion mark for the
first time on record.The nonfood and beverage large format retail sector have also benefited, with strong spending in the furniture,
electrical and hardware category, with spending up 12% compared to December 2019.