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Commercial and industrial property in 2022’s rear-view mirror

Ryan Johnson

Last year was the firm’s strongest yearly result ever in the commercial and industrial space – and despite the challenges, 2022 has been its second best.

However, commenting in the final edition of Total Property for this year, Ryan Johnson, Bayleys’ national director commercial and industrial said from a macro perspective, the last six months have been particularly anomalous.

“When else in history have we ever seen such levels of volatility and risk all colliding at once in such a spectacular way,” he said.

“There’s geopolitical upheaval, a lingering global pandemic, an economic maelstrom with debt crises and recessionary traits, and climate change threats.

“Notably, the speed of change seen in the wider real estate market has been astonishing with sales’ volumes going from peak to trough in lightening quick time, and the cost of debt escalating.”

Johnson said income is becoming the hedge to inflation currently and while industrial and large format retail are clipping that ticket quite confidently, no building owner is immune to the hot-blooded economic environment.

“Deals are still being done, but institutional capital is cautious in this volatile market, and other property owners are opting to wait the market out.

“The balance sheets of all commercial property owners will be sorely tested in 2023, but inevitably, counter-cyclical opportunist buyers will emerge.”

Johnson said CBD retail is recalibrating as office workers return and tourism rebounds, while suburban and neighbourhood shopping centres and retail strips have benefitted from hybrid working dynamics and people spending closer to home.

“The most in-demand segment of the market remains large format for both sale and lease, and a lack of available storefront and support warehousing space is thwarting some domestic and international business growth plans.

“Meanwhile, institutional investors and owner-occupiers are still purchasing well-located properties in identified growth areas, and we’re seeing strong interest from overseas retailers wanting to break into or expand across the New Zealand market.

In the hotels, tourism and leisure property market (HTL), Johnson said transaction volumes and values have started to bounce back existing with industry participants securing additional accommodation opportunities, and strong enquiry from large global hotel brands.

“Bayleys’ HTL team has seen strong demand for mid-sized accommodation properties, predominantly freehold going-concerns and freehold investments.

“On the business-only side of the coin, more equity is being demanded by banks as loan-to-value ratios are adjusted so there’s some tension there.

“Other notable challenges in the commercial accommodation arena are aging assets showing high deferred maintenance, a shortage of new-build mid-size assets, rising cost of debt and materials, and the continued secondment of motels for emergency and transitional housing.

The business sales’ segment of Bayleys’ operations is experiencing an uptick in interest and activity as business owners transcend pandemic-related hindrances.

“Any business that has essential service status has done very well, but now we’re seeing other business categories gather speed,” said Johnson.

“Lenders haven’t really known how to navigate the changed landscape when approving funding for business acquisitions in the past couple of years and that’s been a sticking point for sellers and buyers.

“However, Bayleys’ business sales’ team has been able to creatively get deals over the line with vendor funding, sales of company shares rather than assets and carefully structured acquisitions.”

Industrial property remains the best-performing asset class across the commercial sectors, with the ongoing challenge being lack of supply.

“Ecommerce, logistics/distribution, ‘just-in-case’ inventory demands and manufacturing continue to drive the market, with historically-low vacancy resulting in 20-30 percent rental growth in the last 12 months,” explained Johnson.

“Sales-wise, we’ve noted an overall softening of values of between 100-130 basis points over the year, but that has flattened out somewhat now and we don’t expect values to soften much further due to the cost of replacement.

“Industrial land costs have stabilised and we’d expect vacancy rates to soften slightly as new developments catch up and come on-stream.

“Vacant stock currently has greater appeal than investment stock, with owner-occupiers gaining support from the banking sector, although we anticipate potential friction in the refinancing market on the back of higher interest rates and loan-to-value thresholds.

As occupiers move back to the office, with an element of hybrid flexibility built-in, office assets have rallied according to Johnson.

“The flight to quality continues, largely to waterfront or downtown locations and towards new-build stock with efficient floor plates, flexibility, and intuitive fitouts that reflect modern ways of working.

“As the office market resets and while occupiers seek to accurately forecast their footprint requirements, sublease opportunities have appeared offering options to a broad range of businesses.

“How B and C-grade and fringe-located vacant buildings play out will be interesting with potential conversion to alternative use, upgrades to higher NBS thresholds, and improved green credentials and amenity being weighed up against market demand.”

Johnson said capital market sale and purchase transactions in the office market have stalled as rising interest rates and inflation show their hand.

“Standout positives in the office sector this year include the resilience of CBD occupancy numbers, the rise of quality assets, and the willingness and tenacity of developers to progress new builds.”

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