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Industrial Workplace – August 2019

Anchoring the industrial sector

Strong employment growth driven by an expanding economy has, in turn, promoted an increased demand for industrial workspace. The results, across the country, have been seen in the form of falling vacancy rates, upward pressure on rentals and a ramp up in development.

This is the picture facing occupiers of industrial real estate and, looking ahead, most of these fundamentals seem set to remain in play in the industrial leasing market over the rest of 2019.

Strong job market driving demand

In 2010, as New Zealand’s economy began its post-Global Financial Crisis recovery, approximately 425,200 people were employed in the country’s industrial sector across 92,325 business units. By February of 2018, employee numbers had risen by 21 percent to 514,700, while the number of business units has reached 104,915, an increase of nearly 14 percent.

Anchoring the industrial sector

These figures reflect a strongly performing economy with high levels of business creation and expansion. The demand for more workspace this has created, including robust demand for quality industrial workspace, has seen vacancy rates across New Zealand’s major centres being squeezed down, in many cases to historically low levels.

Nowhere is this trend more evident than in the ‘golden triangle’ centres of Auckland, Hamilton and Tauranga, along with Wellington, where average vacancy rates have been trending lower in recent years. Average rates now sit at or below three percent across all of these cities’ major precincts.

In Wellington, vacancy reached a cyclical peak of 7.5 percent in 2012. By late 2018 this stood at just three percent, the same rate as Hamilton. Conditions are even tighter in Tauranga and Auckland. Tauranga has seen a particularly steep decline; in early 2015 its average vacancy rate was recorded as 13.5 percent, while in Bayleys Research’s latest vacancy survey the figure was just 2.4 percent.

Conditions in Auckland have been tight for an extended period, with vacancy continuing to track down over the past year from a figure of 3.3 percent to sub-three percent.

Christchurch market reports indicate that vacancy rates there have begun to trend upwards over recent months. This, though, reflects the unique dynamics of this market post the 2010 and 2011 earthquakes. Demand from the construction sector increased sharply given the requirements to provide new housing and repair infrastructure.

In addition, Christchurch has cemented its position as the South Island’s logistics and distribution hub, supported by massive spending on roading infrastructure. This demand sparked a significant supply response. As companies have moved into new and larger premises, the secondary grade property vacated has pushed up vacancy rates overall, albeit that prime grade vacancy is negligible.

Step-up in construction

The country’s development sector has responded strongly to the tightening conditions over recent years with a step-up in construction activity to deliver new space.

Industrial building consents issued in 2018 reached a total value of $1.4 billion nationally, up almost 20 percent on 2017 and more than double the total recorded in 2012.

Anchoring the industrial sector

Auckland accounted for 43 percent of all consents issued last year, reflecting the city’s position as New Zealand’s economic powerhouse. It is likely that development in Auckland would have been greater was it not for constraints on the supply of land.

Within the city’s established precincts there is very little vacant development land, and what there is generally commands values which make industrial development unviable. As a result, there will be an increasing trend towards higher and better uses for land within industrial precincts, particularly those that are located in proximity to the CBD.

Christchurch’s share of new development has begun to fall, reflecting the post-quake city’s unique supply-and-demand dynamics. In 2016, industrial development in the city accounted for 32 percent of the national total (by value); this figure fell to 18 percent in 2018.

Consents across all major centres, though, saw an increase in 2018 pointing towards another strong year of construction in 2019, with new workspace options coming on stream as part of the future property mix for industrial tenants.

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