Another strong year in industrial sales and leasing activity looks set to continue, says Scott Campbell, national director, industrial and logistics for Bayleys Real Estate.
“Strong market conditions with industrial sector demand outpacing supply is a consistent trend in Auckland. This is why investors keep choosing to buy industrial property,” Campbell says.
In Auckland, Bayleys Real Estate concluded 202 industrial leases and 181 sales over the past year, comprising an aggregate value of more than $725 million of property transacted and 231,675 sqm of space.
The strong levels of leasing activity experienced resonates in the latest industrial Bayleys Research. There is only 167,350sqm of vacant space out of 4.8 million sqm surveyed in Auckland’s leading industrial precincts.
Bayleys Research’s report, to be released in mid-May, found that pockets of opportunity are arising due to the recent highs in construction activity, but that had yet to make a significant impact on currently available space.
Mr. Campbell says: “Indications are that this tight market will continue over the short-term. This means that tenants who aren't pre-planning may be frustrated with the lack of choice. Rental costs will likely increase as a result."
“Additional tracts of industrial zoned land being re-zoned and released, especially in growth areas in the north, west and south, may provide some relief”.
Crosshead: More space underway
Developers have been busy trying to ramp up development activity as a consequence of the demand. Close to 250,000sqm of space was completed between Bayleys’ surveys. Mr. Campbell says: “This is one of the busiest periods of activity Auckland’s seen as highlighted by recent building consent data and. Our development tracker shows more is on the way.
“Compounding upon the sector’s high levels of tenant demand and undersupply is the increase in construction activity from all property sectors. This translates into more tenant demand. A nice problem to have, but still a problem for a sector experiencing such high capacity constraints.”
A significant proportion of the development activity is in the South of Auckland. This is due to its long-term popularity, proximity to national motorway networks, the airport as well as the area’s availability of land. This skew in new development activity in the area does have its benefits, providing a short window of opportunity for tenants looking for space.
Mr Campbell says: “In the future, development activity will rise. Growth enabled by the Unitary Plan (operative in part) will be provided further South of the main established industrial precincts - in areas such as south of Takanini and Drury. This highlights the future direction of Auckland’s new heavy and light industrial sector.
While industrial precincts in the North Shore provide a pivotal role in the servicing of a large population base, land constraints have seen the focus shift to the west and to areas further north, such as Silverdale. North Shore’s industrial vacancy rate is just 1.1%.
Crosshead: Rents rising, yields firming
Mr Campbell says Auckland prime industrial net face warehouse rents increased a further 3-4% over the past year, with secondary sector rents increasing by between 5% and 6%, albeit from a lower base. “Over the past three years, a common period for reviews, rents are up by around 10% to 12%. Canopy, yard space and operating expenses continue to edge higher as well,” he says.
Bayleys predicts existing premises will experience rent increases of between 2% and 4% pa depending on the level of ‘over’ or ‘under’ renting. New build premises will likely be near the top of this range. The rate of prime yield compression over the past year has again been significant with a further decrease of 120 basis points to 5.4%. However, this rate of compression is likely to slow given interest rates are already edging higher. Although investors remain active, they are cautiously confident and are reassessing their levels of risk appropriately.
However, the rate of prime yield change is still one of the largest and has significantly outpaced other major cities around the world, according to the latest Cushman & Wakefield data.
Further evidence of the sector’s popularity is illustrated in Bayleys’ research that found 56% of all Auckland’s annual commercial property sale transactions in 2016 were in the industrial sector. Considering that 85% of all commercial property transactions in New Zealand sell for $2 million or less, industrial property - typically of a lower dollar value than the commercial office and retail sectors - provides a large pool of opportunities, but bidding is competitive.
Crosshead: Market trends to watch
Future market trends include the ability to resource at the scale of activity required, infrastructure and congestion issues as well as the availability of stock to purchase. Mr Campbell says: “History suggests many construction companies in New Zealand plan for short-term cyclical gains rather than the long-term, which increases costs. Increasing scale will alleviate many price pressures.
“The sector is also experiencing pressure from the increase in travel time duration and fluctuation due to the lack of infrastructure investment. More central and local government spending is essential. In the interim, businesses will need to align their future accommodation, distribution and staff and recruitment strategies carefully.
“Despite these issues, the attractiveness of owning industrial property will continue, keeping bidding high. Assisting buyers will be the greater selection of stock to choose from over the next year.”