Commercial Overview with Lance Judson

Thriving Commercial Real Estate Market Defies Challenges and Embraces Post-Covid Opportunities

Despite what all the doomsdayers and naysayers are saying, Commercial, especially in the provinces is going gangbusters. In fact Property Brokers has had a strong two months of Commercial sales in March and April! Sure, development funding is tight, there is a shortage of trained and experienced staff and there is a nervousness in the sector, but deals are still being transacted, specific sectors are growing, businesses are still needing bigger and brighter premises and the new way of doing business post-Covid is being embraced.  

In a recent blog called “The Bust Cycle” I highlighted stats from the Ministry of Business, Innovation and Employment (MBIE) regarding the number of construction businesses that have gone to the wall from August 2022 to January 2023 - 183 in fact. However, contrary to this, MBIE noted in their 2022 State of the Building and Construction Sector report that “three-quarters of business owners or managers were confident their businesses would still be operating in two years time, with most having plenty of work for the next 12 months”. 

 Some of the reasons highlighted for the increased number of liquidations recently include easy credit from the Covid era drying up, cost of materials increasing and the shortage of skilled labour meaning not only labour shortages within the industry but projects getting behind schedule. 

This was again highlighted in BDO’s recent report “Beyond Boom and Bust” where they found that there was plenty of work on, however 80% of respondents stated that a labour shortage was their biggest challenge. The report found that rather than turn down work due to a lack of labour and materials, businesses were taking longer to finish projects with only 12% completed on time over the past 6 months. This of course has flow on effects for the likes of tradies, suppliers of scaffolding and cranes having to remain onsite longer, not to mention cost overruns and penalty payments. 

The lack of supply of quality industrial land and product will ensure the industrial sector remains strong in the foreseeable future. 

The same can be said for office space. A flight to quality space and hybrid flexibility is resetting the benchmark for what is acceptable to tenants and what is not. Many businesses are now looking for efficient floorplates, flexibility and intuitive fitouts with a focus on green builds being the order of the day. Employee well-being is a key focus for businesses wishing to attract and retain staff. Buildings with gyms, cafes and childcare facilities are becoming more common as workers demand more employee sympathetic spaces and work environments. B grade buildings, unless they’ve undergone substantial refurbishment are struggling to be tenanted with the void between primary and secondary demand growing.     

Its always nice to end a report on a positive note so here are a few positives: 

• It looks as though interest rates are close to topping out and a dip in rates could be on the cards in early 2024 
• "We expect the APAC region to outperform all other markets in 2023. There are significant headwinds in Europe and the US with real risks of recession. As a result, we think APAC will be a haven for property investments. As the debt markets stabilise and volatility fades, we also expect private equity to ramp up M&A activities through 2023.”  Adam Woodward Head of Office Capital Markets 
• Online industry monitor Eboss has reported that the cost of building properties appears to have plateaued and costs may actually fall. This is supported by Corelogic’s Cordell Construction Cost Index (CCCI) which reported construction costs rose 0.6% in the March quarter, well below the average quarterly increases of 2% recorded in 2021 and 2022 

•  There is a record number of long-term cranes on construction sites around the country – 157 across the seven main centres compared to the previous record of 150 in the first quarter of last year  
• Ongoing tenant demand in industrial properties has seen vacancy rates at historic low levels despite a softening economy, rising interest rates and strong development activity 

“Not so,” says Greg Harford, CE of Retail New Zealand. In an interview with Newstalk ZB recently, Harford believes Kiwis are “omnichannel shoppers”, and New Zealand is going through an omnichannel shopping boom.

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