New Zealand Market | Research Report April 2023

Industrial property’s appeal continues

Ongoing tenant demand for industrial property has kept vacancy rates at historically low levels, despite higher interest rates, a cooling economy, and increased development activity. Although, sales activity volumes for industrial premises have slowed due to challenging economic and tougher financial conditions, industrial property’s strong fundamentals continue to underpin the sector’s safe-haven credentials which have seen the sector’s share of total commercial and industrial sales increasing.

Strong demand holds vacancy at historic lows

Auckland's industrial vacancy rate was recorded at 1.9% by Colliers Research in its latest February 2023 survey, virtually unchanged from the August 2022 figure of 1.8%. Vacancy across the region's major industrial precincts have been below 2.5% since February 2015. Conditions are tighter at the prime end of the market, with vacancy measured at a new record low of just 0.5%.

When viewing the results by area, vacancy declined in the region's three largest industrial precincts over the six months to February. In East Tamaki, which has a total inventory of nearly 2,500,000 sqm, vacancy declined from 1.5% to 1.3%. Across the Onehunga/Penrose precinct, vacancy dropped from 2.7% in August to 2.0% in February.

Vacancy increased in Mount Wellington the fourth largest of the region’s precincts. Overall vacancy rose to 0.9% from 0.3% six months earlier. The increase has, however, been driven entirely by the secondary sector in which vacancy has reached 2.3%. By contrast, as at the date of survey, there were no prime grade leasing options. The extended period of tight market conditions and limited development opportunities within most established precincts has resulted in the emergence of new industrial zones on the periphery of the city. These zones are also witnessing strong demand and low vacancy rates. In Westgate, over 16,000 sqm of workspace was added to the area's inventory between August 2022 and February 2023, yet vacancy remained virtually unchanged at 0.6% in February. In Silverdale, vacancy declined to 2.5% from 3.3%, despite development adding 19,500 sqm of stock.

Development slows as constraints remain in play

Construction activity recovered quickly following a sharp decline resulting from the onset of the COVID-19 pandemic. High levels of demand and accommodative economic conditions bolstered confidence within the development sector. Building consent issuance for the year ending November 2022 reached 540,187 sqm, almost at the record level of 569,682 sqm recorded for the 12-month period ending in July 2019.

has been milder the total new floor area approved has slipped from a peak of 254,200 sqm as of October 2022 to 244,171 sqm in February.

The slowing of momentum reflects a combination of constraints impacting the development sector. A shortage of skilled workers and supply chain disruption has contributed to rapidly rising construction costs, which, accordingto StatsNZ's capital goods price index, saw costs for industrial premises increase by a further 10.1% over 2022. A shortage of appropriately zoned land for industrial expansion is another major constraint. Land shortages, particularly within established precincts, have kept prices elevated, with the average cost of industrial land across

Auckland of $1,185 per sqm at the end of 2022, well above the approximately $805 per sqm recorded in December 2020.

Easing of some impediments will be welcome

While the results of vacancy surveys and upward pressure on rentals, which reached record levels in 2022, reflect the need for significant additions to stock, particularly at the prime end of the market, challenges faced by the development sector have intensified, leading to a slowdown in activity. The latest consents data released by StatsNZ shows the total floor area approved over the year to January 2023 to be 393,453 sqm, the first time the rolling total has fallen below 400,000 sqm since November 2021.

Once again, the trends evident in Auckland have parallels elsewhere in the country. In Wellington, the area approved for new construction in the year to February 2023 was 40,103 sqm, having peaked at 56,490 sqm in the 12 months ending September 2009. In Christchurch, whilst the decline

Although the construction sector will face challenges in the remainder of 2023, the industry will welcome the easing of some of the industry’s major constraints. Building costs have shown evidence of passing their peak, due to a reduction in supply chain issues and a slowing of trade rate increases. Moreover, the government has taken steps to ease skills shortages by creating new pathways for overseas workers to obtain work visas, such as reopening the skilled migrant category residence visa, which had been suspended during New Zealand's border closure, and implementing the Accredited Employer Work Visa system.