OCR cuts signal end to tough times for commercial property

Sunday, 15 December 2024

Commercial property transactions have plummeted about 40% from the market peak, and are now at their lowest level in a decade, experts say.

High interest rates and weak economic activity, combined with shifts in behaviour and demand have negatively impacted the sector, particularly office and retail property.

That has led to the value of commercial property assets falling by about 10% since the market peak in 2021, according to a new Westpac report.

The number of transactions have also fallen with the value of sales dropping below $6 billion over the year to June 2024, it found.

Westpac senior economist Satish Ranchhod said that was the lowest in over a decade, and well down from the levels of around $10b per annum in the years prior to the pandemic.

With the downturn in economic growth, the past year had seen rent growth slowing across all commercial property segments, he said.

“Conditions in the sector are expected to firm again over the coming years, with interest rates now dropping, and GDP growth expected to accelerate to 2.3% in 2025 and 2.7% in 2026.

“That strengthening in economic activity is likely to fuel increased occupier demand for space, and it will also boost investor appetites.”

But with the economic recovery to be gradual, the demand for commercial property was likely to remain subdued in the near term, he said.

Kiwibank also weighed in on commercial property in a recent report. It found that property values, rental indices, and sales volumes had all suffered declines, while vacancies had risen.

But Kiwibank economist Sabrina Delgado said it was important to note that not all sub-sectors had been impacted the same, and there were growing divergences across the three main types of property.

“All have seen a decline in sales activity following 2021, but the industrial sector has outperformed both office and retail sectors over the downturn in terms of higher rents and lower vacancies.”

The working from home trend had led to a shift in office demand, and businesses had tried to get workers back by opting for better, flashier offices, she said.

“As such, the office sector has seen a growing divergence in tenancy demand between what is classed as a prime and secondary office.

“This ‘flight to quality’ phenomenon has seen significantly lower vacancy rates and higher rental growth in the prime office market.”

Meanwhile, the retail sector had seen the closure of stores due to tough economic conditions, Delgado said.

The problems were compounded by less foot traffic in typically busy areas because more people were working from home, and the rise of e-commerce.

“That has had a negative impact on the property sector with higher vacancies and waning demand for new retail spaces.”

With rate cuts under way and investor confidence rising, the sector should see more activity, but structural changes would weigh on the market, she said.

“It’s industrial property that seems prepped to fly as shortages remain amid growing demand.”

For JLL NZ head of research Chris Dibble, the best term to describe the year in commercial property was “mixed and more”.

That was because while market conditions had been challenging, a turning point came in August when the Reserve Bank started cutting the official cash rate.

He said JLL’s analysis had commercial transactions this year down about 40% from the market peak in 2021.

The company looked at transactions of $5 million and over, but it suggested activity was back around the level seen over the 2014 to 2018 pre-boom period, he said.

“But the OCR cuts are a trigger point for more transactional activity as they mean lower interest rate costs and more confidence in the market, and that supports demand.”

The market was still very much in the transition period, but there would be opportunities for occupiers and investors in the new year, Dibble said.

“Occupiers will find more options available, but it's crucial to start strategic planning to secure the best outcomes as these will diminish if left for too long.

“For investors, we anticipate asset value appreciation and competition for quality assets, particularly those with strong sustainability credentials and in prime locations.”

Industrial property would maintain its status as the stable backbone of the sector, while premium office spaces would continue to dominate tenant demand, and large format retail properties would perform well, he said.

Traditionally, when the market cycle starts to turn and improve, investor confidence and interest grows.

Commercial property buyers agent Dylan Menzies, from Rethink Investing, said that was happening, and he was seeing strong demand for commercial property.

There was significant interest from international investors, and he was getting a lot of inquiries from investors based in Australia, Singapore and China, he said.

“For Australians, the sort of deals available here are 30 to 40% better than the deals in Australia. There’s less competition here, the costs are cheaper, and there’s no capital gains tax or stamp duty.”

The big impetus for the renewed interest was the OCR cuts, and the trajectory signalled by the Reserve Bank, he said.

“It has also led to an uptick in the number of properties coming on to the market too. As an agent, I’m getting sent more deals to put to clients.

“The increase in supply is likely to keep prices subdued for longer, but prices will start to shift up again when the new supply is absorbed, perhaps toward the end of 2025.”