Commercial Property Market: 2021 Review & 2022 Predictions

Looking back in the rearview mirror and looking forward to the road ahead.

Commercial Property Market: 2021 Review  & 2022 Predictions

2021 – In the Rearview Mirror

The commercial property market has performed better than expected since our initial lockdown in March 2021. Vacancies are low, and prices have increased.  

However, the effects of lockdown on the commercial property market have varied across market sectors, with holes appearing in some retail (especially strip retail), travel, hospitality and tourism sectors across New Zealand. 

Several drivers determine the performance of the commercial property market, including:

  • Growing tenant demand, especially in the industrial sector. Strong growth in warehousing, logistics and construction underpin this driver.
  • Strong investor demand. With a decline in the OCR, investors are now looking for options that reward better returns.
  • Investment Syndicators chasing limited quality assets to syndicate into their funds as funding costs reduced
  • Experienced investors targeting assets that have softened in price due to the effects of lockdown but anticipate price growth as the economy rebounds.
  • Owner-occupiers taking advantage of low funding costs to move from leased premises to owned premises.

Impact of the OCR Reductions

As the OCR reduced to sub 1% over the past 2 years, commercial property market yields have compressed and reduced.

Official Cash Rate

The table and example below illustrates the effect of these compressing yields.

A 1960s industrial building in Seaview, Wellington, with a 10-year lease to an industrial occupier, has resold 3 times since October 2019. In those 16 months, the yield compressed from 7.02% to 4.46%, and the purchase price increased by $4.99m.

2022 – The Road Ahead 

As the economy normalises from the post-lockdown bounce back of 2021 and assuming the economy continues to grow at a sustainable rate, my predictions for the commercial property market are that:

  • Yields will increase as investors factor in rising interest rates.
  • Commercial property transactions will increase as the economy rebounds and confidence builds.
  • Vendors will chase yields, and purchasers will seek to lock in funding for their investment purchases or secure premises for occupation.

For example, we recently acted for a client purchasing a significant industrial asset with rental cash flow and vacant land capacity. The plan enabled the client to build premises and relocate their business. We factored in a higher yield requirement with the existing rental cashflows onsite to compensate for the rising funding costs. We also recommended locking the current funding interest rate to protect against forecasted interest rate increases.  

The Rebound by Sector

  • Industrial– will remain strong, especially across the manufacturing (as overseas supply chain issues result in companies resorting to local manufacturers), warehousing, distribution, and construction sectors.
  • Retail will be lumpy and uneven due to changed buying habits, lockdown effects, and the accelerated shift to online shopping. 

For instance, during lockdown, I discovered a local neighbourhood company that had a lucrative business delivering fresh fruit and vegetables to restaurants. A necessary pivot resulted in their supplying the retail market via home delivery. The service and the produce are excellent, and I have continued my online purchasing habit with this company.

The gaps that strip and standalone retail create will result in opportunities for other retailers. These will include:

      • The opportunity to expand as premises become available 
      • The chance to respond to or challenge a change in buying habits, the online market and economic drivers
      • The opportunity to acquire quality staff as other retailers close
  • Office – will be a mixed bag and dependent upon whether the trend of “working from home” continues or whether organisations bring their staff back into the office full time. If continued, the WFH trend will accelerate the gradual move to collaborative/flexible workspaces requiring less per employee.

There is an opportunity for office occupiers to create and provide more flexible working environments for their staff, reducing their accommodation costs and demand for office space.

Given the nature of office occupiers, it may be that suburban offices will outperform CBD offices as the impact of these trends may have more effect on CBD office space in the short term.

We recently acted for a client, advising and structuring their suburban commercial office’s sale and leaseback transaction. The yield achieved was 5.11%, which, we understand, set some records in the local area.

Client tenancy opportunities in 2022

With compressing yields and the vagaries of the effects of lockdown impacting some property sectors more than others, we see opportunities for clients to: 

  • Expand and grow their business reach by sourcing premises and negotiating leases across New Zealand; 
  • Purchase development sites to build bespoke facilities for owner occupation;
  • Purchase vacant premises to occupy and then re-sell with a leaseback in place.

Key Takeaways

  • I am cautiously optimistic – there are likely to be bumps in the road as we travel towards normalisation
  • There will to likely be more opportunities to lease or acquire premises

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Marcus Bosch

Marcus Bosch

Managing Director

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