The squeeze is on

During pandemic-fuelled 2020, industrial businesses experienced fewer disruptions to normal operations than their counterparts in the office sector and most of the retail sub-sectors and in fact, many got even busier.

Scott Campbell, Bayleys’ national director industrial sales and leasing, says much of the industrial market was classified as essential business, so work went on largely as normal – albeit with stricter health protocols and new processes to follow.

“As a result, demand for industrial space went through the roof and this continues to put pressure on both the current supply of property and those developments rolling out in the short term,” he says.

“The industrial market has outperformed other property sectors in the past 18 months, holding its own as a well-returning asset class for landlords, providing capital growth for owner-occupiers and hotly-contested by a wide range of investors.

Unprecedented growth in the e-commerce sector as retailers scale up their online presence to cope with changing consumer patterns means demand for warehousing is at an all-time high.

It has become crucial for businesses to have good integration with 3PL and 4PL service providers to ensure efficiency from production to delivery, says Campbell and the last mile has become a critical aspect of the supply chain.

Market fundamentals

Nationally, there was a 35 percent increase in the number of building consents issued for new industrial buildings in the year ending March 2021, on the year prior.

The Auckland region, with 39 percent of all consents issued in New Zealand, and a total value of just shy of $700 million, heads the league table.

The greatest change was in the BOP region which increased by over 200 percent in the year to April with over $200 million of consents issued – the highest figure since 2010, and making up 15 percent of all national consents. The biggest drop was in the Canterbury region where the number of consents dropped by 23 percent.

Meanwhile, the annual average unemployment rate in New Zealand was at 4 percent in June 2021 on a seasonally adjusted basis, down from 4.7 percent in the previous quarter, but, when looking at figures over the last decade, well short of New Zealand’s peak of 6.5 percent in December 2012.

There is still spare capacity left in the economy as data shows that those people who are in work, want to be doing more and working more hours.

The economy is still below pre-pandemic levels as the total number of hours worked dropped 2.3 percent on a seasonally adjusted basis.

Auckland market

The Auckland industrial market barely registered the impact of COVID-19 restrictions compared to other asset classes around the region that are still recovering.

The latest Bayleys’ industrial survey shows that vacancy has dropped down to a record low of 1.62 percent across Auckland, with sub-1 percent vacancy rates across multiple precincts including at East Tamaki and West Auckland.

Scott Campbell says a strong development pipeline is expected to meet some of the ongoing demand for industrial space in the Auckland market – but in many ways, it’ll be just a drop in the demand bucket.

“In the last few years, there has been a rise of speculative development by some of the larger developers and landholders like Goodman, Auckland International Airport, and private developers like James Kirkpatrick Group and Euroclass.

Campbell says the expansion of the logistics sector in the last decade in Auckland has put steady upward pressure on rents across the market, and this looks set to continue with low vacancy making it harder for occupiers to find space.

Wellington market

Fraser Press, a director with Bayleys Wellington Commercial says a dire shortage of available stock is proving frustrating and with obstinately low vacancy rates across the sought-after established industrial precincts, there’s a lot of hope being pinned on the development pipeline.

“The number of industrial consents issued rose just 10 percent in the year to April 2021 compared to the previous year,” he says.

“Multiple business parks are being developed around Wellington, generally offering smaller units in the 50-250-square metre range which appeal to the owner-occupier market, but also to investors who are taking notice of the demand and committing to space off the plans.

Press says while the search for space is competitive and showing no sign of easing off, larger occupiers – especially those in growth mode – are finding it particularly tough.

“The outlook for the Wellington region continues to be for a very tight market, with limited developable land coming onstream to support the demand,” he says.

“Record low vacancy and this constrained market have resulted in rental levels staying steady in the post-COVID market, but it’s likely we will see upward pressures on rental levels – especially as land and construction costs rise for the development sector.

With the much-anticipated Transmission Gully (hopefully) opening this year, the region’s arterial access dynamics are set for a shakeup and it remains to be seen what affect this has on industrial land and property Wellington-wide.

Christchurch market

Nick O’Styke, commercial and industrial broker with Bayleys Christchurch, says as the second-largest industrial market in New Zealand and the entryway into the South Island for many investors and occupiers alike, Christchurch’s economic fundamentals are in good heart.

“On a provisional basis, GDP in the year to March 2021 was down just 2-percent compared to the year earlier, better than the national GDP figure which was down 3-percent over the same period,” he says.

“Demand for industrial property remains robust and like other parts of the country, Christchurch is waiting on new development stock.

Data shows that industrial building consents are well down on post-quake figures with $167 million of industrial building consents issued in the year to April 2021 – down circa-20 percent on the previous year.

“The industrial sweet spot – and where we are seeing a real shortage of stock – is the 500 to 800 square metre market offering warehousing, office space and good access.

O’Styke says rents on the whole are holding stable in the Christchurch market, but the shrinkage in available stock is likely to place upward pressure on rents in coming months.

His advice to occupiers looking for new premises is to start the run-up early.

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