Cloudy with a chance of sunshine

Ryan Johnson

National Director, Commercial and Industrial

It’s going to be a year of two halves. Most people are expecting a quiet, cautious first quarter of the calendar year as the cost-of-debt and inflation picture starts to become more clear.

The three ‘R’s with the biggest influence on the market in 2023 will be “re-valuation”, “refinancing”, and “recession”. It is accepted by most that 2023 will be a recessionary year and once the evidence of that starts flowing in through February and March we’ll start to see a dramatic shift in valuations and then refinancing.

Many vendors are committed to transacting and can’t keep holding off on restructuring their balance sheets.

2022 saw the lowest number of sales since 1991, with wide bid-ask spreads behind a general reluctance to trade. In the second half of this year that will speed up as evidence of recession starts to appear and there is more certainty around both the cost of debt, inflation and pricing.

While caution is still the most prevalent mood in the market, as we get more certainty around pricing, there will be good opportunities for investors. There’s still a lot of private equity out there with strong balance sheets looking for the right opportunity.

We’ll also see businesses focusing on income with cap rates softening because they won’t have that cap rate appreciation that we’ve seen over the last eight years.

Strong inflation costs and softening cap rates could also see a slowdown in development and a dip in supply.

The other global trend making itself felt here is the ongoing emergence of ESG-driven assets and policies. ESG is a significant, and growing focus, particularly for occupiers, but will be interesting to see how it is prioritised when margins are being squeezed in terms of profitability.

Chris Beasleigh

National Director Retail

With rising interest rates it is likely that many people will have less to spend in 2023, understandably directing income to mortgage repayments and other debt servicing. That, along with some expected uncertainty mid-year that always comes with a general election, means big-ticket purchases will likely be put on hold.

That could add strain for some retailers already struggling and will likely see an uptick in retail businesses going under.

Most businesses are expecting a tough ride through the first six to nine months of the year, with the hope of a bounce-back by the last quarter. That’s driven by the hope that increased interest rates will be a short, sharp shock before they start coming back down again.

On the other side of the equation, the borders are open and visitors are coming in with money to spend. There’s also some hope that re-opened borders might start to address the staffing shortages that have impacted businesses across the retail sector.

The numbers of potential workers coming in are still low and slow, but they are starting to arrive which may ease one challenge for retail businesses in 2023.

The other interesting point is that as shops come up for lease, they are being picked up by new tenants so while there is churn, that market is fairly stable.

Large-format retail has had a better time than other parts of the sector over the pandemic years. It should remain strong and resilient through 2023, with many of the main players looking to expand, if they’re able to navigate construction costs, alongside inflating interest rates and shifting valuations.

Wayne Keene

National Director Hotels, Tourism and Leisure (HTL)

With favourable exchange rates for many overseas tourists, and rising visitor numbers the HTL sector is looking at a steady 2023.

There will still be challenges, particularly in the first quarter, from rising interest rates. This will mean we are likely to see some businesses come to the market. Rising interest rates on maturing loans will have an effect on profits which ultimately carry through to return on investment. We will see some pressure on operators across the industry however, the Ministry of Social Development continues to prop up a good percentage of the motel sector and with fewer available rooms things should even out.

The good news is that in the event of a market correction, there will be strong interest in those sales as more people see the chance to buy a going-concern business and add value for future capital gain. We are seeing good listings come to market with reasonably strong enquiry, particularly if there is a freehold element. Looking ahead, we’re optimistic about sales and believe the year will present more opportunities.

The other big challenge for the HTL sector remains the workforce shortage. We are seeing some large hotels having to operating at only 75-percent occupancy and unable to offer a full service due to a lack of cleaning and hospitality staff. Active measures to fill those jobs will have a very positive impact on the market.

Post-MIQ refurbishment has been on the agenda for many and is largely completed, with tourists flooding back. Hotels are enjoying higher rates as room inventories increase.

That’s a harder equation for smaller operators, many of whom have survived the pandemic as emergency accommodation providers for the government. Refurbishment for these properties will be some years away or at least have to wait until operators revert to transient accommodation.

Despite the challenges the overall mood in HTL is positive, boosted by returning tourists and plenty of New Zealanders still travelling locally.

Scott Campbell

National Director Industrial and Logistics

As with most commercial sectors, the industrial investment market paused a little bit through 2022, but we expect it to find its level again within the next six months as the economic landscape becomes a bit more certain.

The intense demand for logistics space that was a feature of pandemic supply management will again be sought after in 2023 as demand for goods and services remains strong. Goods that were stockpiled to deal with supply chain issues will start to be used and that should also free up warehouse space, but lack of speculative development means the low vacancy environment across New Zealand will continue.

When it comes to industrial new builds and development the big players will continue on with their building programmes, though we could see a bit of a slowdown there until yields and construction costs stabilise through the year. All of the new builds are coming through with carbon-neutral or Green Star ratings.

We are starting to see longer-term leases which is good news for investors, and, for occupiers, rent growth will likely continue but should be at a steadier rate, rather than the huge jumps we’ve seen over the past couple of years.

As recession hits businesses, it would also be wise for investors to keep an eye on their occupiers’ balance sheets to be confident they have enough forward work and income to meet their rent.

Now that we are through the pandemic era we should see an increase in international investment. That’s initially from the Australians and Singaporeans coming back into the market but softening yields should start to spark more activity.

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