September 2023 - Bay of Plenty Business News

12 BAY OF PLENTY BUSINESS NEWS September 2023
Up-and-away industrial rents
Around the world, rising interest
rates, high inflation and geopolitical
risks are backdropping
a more challenging and volatile business
environment.
Bayleys’ global real estate partner
Knight Frank says in its latest The
State of Logistics: Asia-Pacific Focus
Report 2023, the logistics sector’s
strong fundamentals will ensure its
resilience in the face of these challenges
despite an easing of “just-incase”
inventory management strategies
that emerged during the pandemic, and
lower online transaction volumes.
When supply-chains were fractured,
there was frenetic competition
for institutional-grade logistics assets
as larger occupiers acquired more
space than normal in anticipation of
more consumer demand for products
which in turn, drove rental growth to
record levels.
Vacancy remains tight and rents
keep rising
In the New Zealand context, Bayleys’
head of insights, data and consulting,
Chris Farhi says coming into 2023,
there was a prevailing sense that the
pressure might be coming off industrial
rents and that demand for warehousing
space could be pegged back,
but this is yet to transpire.
“Because of the general slowdown
in the economy and the fact that by the
end of last year, commentators were
widely tipping that New Zealand was
heading into a technical recession
given GDP indicators, those at the
coal-face of the industrial market were
anticipating rental rates to stabilise,”
says Farhi.
“Additionally, we thought that with
supply chain dynamics settling down,
and the ‘just-in-case’ inventory stockpiling
that we’d seen in the market for
a couple of years likely to tap off, some
of the pressures on warehousing could
start to resolve.
“However, vacancy levels are still
exceedingly tight with pent-up demand
for space and this has driven industrial
rents to unprecedented levels”.
Farhi says any new supply to the
market has pushed average rental rates
up as landlords look to offset escalating
construction, and financing costs
and with higher yields putting downwards
pressure on valuations.
“The development feasibility
matrix has been crushed from all
angles and industrial occupiers looking
to rent brand new stock could be
taken aback at the going rate – particularly
if their existing lease had not
been reset to the market for some time
or they were looking to upgrade to
state-of-the-art premises with optimal
sustainability and amenity credentials.
“Developers are more cautious
in the current environment and are
carefully weighing potential returns
against heightened risks.”
Waitlists for space
Bayleys’ national director industrial,
Scott Campbell says benchmark rents
have been persistently growing for
industrial stock across most of the
major centres.
He says landlords have the advantage
in the current market and this is
not likely to change given the unrelenting
squeeze on space and exacerbated
by a decrease in the number of industrial
building consents issued for new
stock.
“As long as high inflation exists
and interest rates keep rising, rents
will rise, so tenants have to accept
rental escalation because there’s actually
very little they can do to stem the
tide given the main common ground
between property owners and occupiers
is one party owns the space, and the
other party needs space.
“Bayleys’ tangible point of difference
in the market is the amount of
deal flow through our leasing network
and the fingers we have on the market
pulse which shows not just how
The industrial rental ball is
firmly in the landlords’ court
as occupiers strategise space
requirements.
quickly stock is being absorbed, but
reveals a line of tenants waiting in the
wings.
“We’re looking at how rental rates
are tracking and monitoring transaction
times, and frankly the speed
at which properties are leasing is
astounding – particularly when compared
to other sectors like office, for
example, where despite reasonable
demand, the timeframes for leasing
tend to be more drawn-out.
“We’re talking weeks not months
for industrial space, with multiple
viewings, and many agents reporting
that they are effectively running waitlists
for space.”
Campbell says while construction
costs may have stopped rising at the
levels seen in the last couple of years,
they’re still elevated.
Wage costs are still increasing
and the cost of debt remains high so
developers are understandably hesitant
to progress new projects, despite low
nationwide vacancy levels.
“Realistically, land costs would
have to drop to make the development
equation stack up for a developer in
the current climate.
“Recently completed new-builds
in the major centres are commanding
premium rents that are significantly
higher than existing rents, and occupiers
may have to start looking for
space outside of their core area to get
cost efficiencies from more affordable
space.
“We also note a differential in
rental rates between prime and secondary
stock of around 10-15 percent,
and with occupier sentiment placing
increased emphasis on sustainability
credentials for operational efficiencies
and other ESG-driven initiatives like
staff well-being, landlords are accepting
that they will have to refurbish secondary-grade
facilities to mesh with
occupier strategies.”
Savvy budgeting required
Campbell says occupiers that are
renewing leases are all facing rent
hikes and must do diligent forward
budgeting to reflect these escalations
and establish where the likely new
lease term range may be as inevitably,
it will surpass the levels that might be
forecast through generic budgeting
analysis.
“All leases today are being structured
to factor in rental increases
whether via annual fixed increases,
benchmarked to CPI or market or a
combinations of these rental growth
mechanisms, with landlords being far
more astute about market rent reviews
and with no need for tenant incentives
given the demand-supply dynamics.
“For new leases, occupiers should
expect 3-4 percent annual growth over
the term of the lease and those seeking
new premises should have a clear exit
strategy, brace themselves for competition
and be prepared to commit
quickly.
“While we haven’t seen evidence
of rental auctions, this has merit for
landlords as naturally they are looking
to extract as much rental as they can
for a property while effectively balancing
risk through longer lease terms.
“We did see a ‘best-foot-forward’
deadline leasing campaign for a property
last year and it remains to be seen
whether supply stresses will see this
emerge as a market trend.”
Capacity for rental growth
remains
“In some instances, occupiers are
prepared to lock in a lease for a site
with scale, then sublease components
until they grow into the space if their
lease agreement allows this,” says
Campbell.
“Businesses that are anticipating
growth are proactively building future
capacity into their hunt for space and
in that regard, there’s a distinct advantage
in leasing space from a landlord
with a broad portfolio given they have
ability to move occupiers around to
right-size space.”
Campbell says while it’s not what
occupiers want to hear, rents are
unlikely to drop. “They may plateau
but we can’t find a good supporting
reason for rents to go down.
“However, as the world resets and
supply chain logistics have more certainty
around them, some normalcy
should return to inventory held by
some businesses so those occupiers
that no longer need to hold high levels
of stock may start shedding some
space which could take some pressure
off available supply.”
At Bayleys, we believe relationships are what businesses are built on and how they
succeed. We understand that to maximise the return on your property you need:
Professional property management
A business partner that understands your views and goals
Contact the Bayleys Tauranga Commercial Property Management team today.
Bayleys Tauranga
Commercial Property Management
07 579 0609
jan.cooney@bayleystauranga.co.nz
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