First signs of a downturn in commercial building work may be starting to appear

Property / news

Warning bells ringing for commercial building work as new commercial building consents drop to an almost 30 year low

20th May 22, 11:39am by Greg Ninness

The first signs of a downturn in construction activity may be starting to appear, with the amount of new commercial building space being consented falling to an almost 30 year low.

According to Statistics NZ, 62,403 square metres of new commercial buildings were consented in the first quarter of this year, down from 93,666 in the fourth quarter of last year and 85,122 in the third quarter.

Although the amount of new commercial space consented was lower in the third quarter of 2020 at 58,682 square metres, consent issuance was unusually low from the second quarter of 2020 to the first quarter of 2021, due to pandemic effects.

However, apart from the third quarter of 2020, the amount of new building space consented in the first quarter of this year was at its lowest level in any quarter of the year since the second quarter of 1993.

If that trend continues, the amount of new building work available could start to reduce dramatically over the next couple of years as existing projects are completed.

The downturn in the amount of new commercial space being consented is particularly concerning because the amount of new industrial space, such as factories and warehouses, remains elevated.

In the first quarter of this year, 392,012 square metres of new industrial space was consented, the largest amount since the second quarter of 2019 and the second highest amount since the first quarter of 2004.

However while industrial buildings usually take up a lot of floor space, they are also usually relatively cheap and quick to build, compared to other types of buildings such as office blocks or hotels.

New industrial buildings consented in the first quarter of this year had an average build cost of $1442 per square metre, compared to $3715 per square metre for retail buildings consented over the same period. So relatively speaking, industrial buildings don't provide as much work for the building industry as other types of projects.

The big downturns in new space being consented have been for office and retail buildings.

In the first quarter of this year just 24,274 square metres of new office space was consented, which apart from the Covid-affected period from the second quarter of 2020 to the first quarter of 2021, was the lowest amount of new office space consented in any quarter of the year since the second quarter of 2003.

The amount of new retail space being consented is also unusually low, with just 38,129 square metres of new retail premises consented in the first quarter.

Apart form the fourth quarter of 2020, that was the lowest amount of retail space consented since the fourth quarter of 2017.

Interest.co.nz's Commercial Building Consent Analysis Page provides a quarterly breakdown of consents issued for office, industrial, retail and hotel/motel buildings, by the total amount of space consented, the average size of projects consented, their average construction cost and their average construction cost per square metre. Separate figures are provided for each region where there is a significant amount of commercial construction activity.

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39 Comments

by Pa1nter | 20th May 22, 11:47am 1653004039

So post covid, we're building a lot more factories and a lot less office space.

I'd be amazed if commercial office space picked up in the next 5 years.

by theglc | 20th May 22, 1:42pm 1653010942

Working from home is the new norm, people are not returning to the offices.

There is going to be a lot of offices vacated when the leases expire

by Noncents | 20th May 22, 2:17pm 1653013041

"There is going to be a lot of offices vacated when the leases expire"

Yes, the whole concept of a CBD will disappear, we saw it with Chch after the earthquake. Wellington CBD is a veritable ghost town (EQ started it, Covid finished it off), and Auckland CBD is nothing more than Crime By Day.

by keithwoodford | 20th May 22, 2:11pm 1653012703

I am confident it is warehouses rather than factories.

KeithW

by WestieAJ | 20th May 22, 3:46pm 1653018365

Depends on the quality of the building. Due to current inventory levels there is huge demand for any building that is capable of storing product. But as the supply chain normalises and firms can reduce inventories to be more in line with sales. The stock will move more into the purpose built high stud facilities and older buildings will loose their market.

by Pa1nter | 20th May 22, 5:18pm 1653023888

In my region, it's factories. The only storage being built, is storage for the extra stuff being made by the factories.

All agricultural produce and product.

by MidNZ | 20th May 22, 12:25pm 1653006324

"The downturn in the amount of new commercial space being consented is particularly concerning because the amount of new industrial space, such as factories and warehouses, remains elevated"

Concern for people building offices but maybe a good sign for the economy that we are increasing production locally? Also wasn't it in the news recently that there is a glut of office space available so shouldn't be too surprising that less additional space needs to be built?

by kamo | 20th May 22, 12:25pm 1653006356

It would seem obvious that if people are going to work from home that there would not be a demand for office space

by RickStrauss | 20th May 22, 1:03pm 1653008637

What could make the CBD a better place is focusing on making it a better place to live. Some of that office space could make quite decent apartments.

by The Person | 20th May 22, 3:38pm 1653017938

Yes, office to apartment conversions have been happening for decades. The Auckland Central 'Business' District has long been the largest residential neighbourhood in NZ.

by rastus1 | 20th May 22, 6:47pm 1653029269

But why would you want to live in a CBٍD when you do not need to be there for work purposes?

CBD .... no more, they will become CCD’s. Central Crime Districts.

by nktokyo | 20th May 22, 12:29pm 1653006552

Does that mean we will have construction capacity for some of the infrastructure work?

by Advisor | 20th May 22, 2:40pm 1653014419

Schools and hospitals perhaps. The expected time taken from an indicative business case getting Cabinet approval to the hospital being up and running is 12 years in NZ.

Given the pace of migration and rapid ageing local population in NZ, we cannot afford such stretched timeframes for critical infrastructure delivery.

by Independent_Observer | 20th May 22, 12:31pm 1653006706

The likes of GMT and PFI are both down 20% on the NZX so far this year (after peaking Dec/Jan).

by Squishy | 20th May 22, 12:59pm 1653008374

I'm not too worried about commercial, it's residential that would be alarming given we are in a housing crisis.

by nktokyo | 21st May 22, 6:28am 1653071284

New build sales have completely crashed. Ignore the consent numbers.

by WestieAJ | 20th May 22, 12:59pm 1653008390

Hybrid working = Offices overbuilt.

Online shopping + previous stupidity = Retail overbuilt

Pandemic Supply Chain Chaos = Need for more onshore inventory = Warehousing underbuilt.

Supply Chain normalisation + inflation causing demand destruction for durables = warehousing overbuilt

Then we have nothing that is worth building. Unless we get meaningful population growth

by Noncents | 20th May 22, 2:14pm 1653012846

Immigration to the moon = everything underbuilt. Especially Hospitals, schools, and utilities.

by Averageman | 20th May 22, 2:24pm 1653013460

Remember no one voted to have the last million arrive. There is no mandate for any more without the infrastructure being prepared for it.

by Brock Landers | 20th May 22, 3:58pm 1653019099

That's not going to stop them.

by Advisor | 20th May 22, 3:00pm 1653015638

It's a pyramid scheme. Bring the 1st lot of migrants to cook meals for locals, 2nd lot to build houses for the first, 3rd to provide medical services to lot 1 and 2, and so on...

Meanwhile, spend the extra taxes from income and consumption across those new arrivals on your hardline voters.

by Brock Landers | 20th May 22, 3:59pm 1653019166

Yes it's been apparent for a long time that New Zealand is not run by folks with Mensa membership.

by Pa1nter | 20th May 22, 5:34pm 1653024882

Possibly a good thing, most Mensa members autists.

by Pa1nter | 20th May 22, 5:24pm 1653024274

Imagine how the Tangata Whenua felt.

by CrispyKahawai | 20th May 22, 2:22pm 1653013352

We probably have enough infrastructure that needs replacing to keep builders busy for some time.

by Averageman | 20th May 22, 1:49pm 1653011373

Work from home proven lowering office demand, supply chain issues for imported retail/industrial, negative immigration, and next to no tourism traffic and activity. Add in sweeping inflation, a plunging dollar pushing up imported everything, building supply and labour problems, and lengthy council delays, there are some notable storm clouds

Less than buoyant commercial market.....#nosurprise.

by Zaphod The Flatulant | 20th May 22, 1:55pm 1653011751

Fewer offices needed with WFH and more factories being built? Where's the downside?

by The Person | 20th May 22, 3:40pm 1653018017

Larger homes needed

by Pa1nter | 20th May 22, 5:28pm 1653024527

The employers of WFH staff realise they're paying people a premium for where they want to live?

by HouseMouse | 20th May 22, 1:56pm 1653011783

This should come as no surprise. All entirely predictable.

There is going to be carnage in both residential and commercial construction sectors.

by Small Kev | 20th May 22, 2:12pm 1653012720

Working from home and shop online. Wouldn’t invest heavily in retail and office space, maybe storage and warehouses.

by Averageman | 20th May 22, 2:14pm 1653012877

Property trusts are already well ahead in this.

by Antz | 20th May 22, 6:16pm 1653027367

Yup, currently negotiating on one lease and shopping for commercial space elsewhere. Here's some suggestions from one small business owner (probably on behalf of many another (;-)) for the commercial property sector:

1. get rid of personal guarantee requirements on business owners when they sign a commercial lease

2. get rid of ridiculous CPI or market rent review clauses that mandate increases in prices every year. Do wage earners get that increases every year? Why should commercial landlords?

3. get rid of ridiculous ratchet clauses. Why should commercial rents only every go up? Most lease agreements specifically preclude rents ever decreasing. How does that make the world a better place?

4. why are body corporate costs just passed on to tenants by the landlord, when the tenant typically has no say at the body corporate decision making table. There's no incentive for the landlord to work very hard at making the body corporate work efficiently, because whatever the costs are, the tenant just has to pay them.

So, all of those things are a pain for tenants but, I would argue, also a drag on the economy more broadly and therefore on consumers.

Commercial landlords will clearly have their own perspective on this, but that's my rant as an SME tenant.

by Pa1nter | 20th May 22, 6:27pm 1653028057

Having sat on both sides:

- As a tenant, if your business is viable enough, you should be buying your own premises. Ideally something even bigger than you need, and sub-let the unused space.

- As a landlord, minimise frequent lease increases for the upside of a reliable tenant. But, if the property is worth more over time, that needs to be compensating you, vs. having that same money invested elsewhere.

Unless the economy is going backwards, I wouldn't expect my rent to decrease.

by nktokyo | 21st May 22, 6:30am 1653071417

do you want rent reviews to be left to market rent?

by No Moa | 21st May 22, 7:48am 1653076104

Thanks for sharing Antz, my landlord is looking to renew at + 15% for our warehouse lease. Gets a bit tiring paying for overpriced property when my focus now is on paying staff more so they can cope with coats of rent and mortgage mainly. I have a solid business, years of pain to build it up, but I am propping up the overpriced assets in NZ

by HW2 | 21st May 22, 8:18am 1653077915

Antz, you premise your argument with "Yup, currently negotiating on one lease and shopping for commercial space elsewhere."

If you feel strongly and do not like the terms then do not rent. We are living in a world of choice and that goes for both sides.

What I found leasing my building was that the tenant wanted to pay 24k pa which is peanuts it less than 500pw and I wanted 40k pa. I knew the property was worth that everyday and so did the tenant. They now make an extremely good living in a good spot turning over close to 1 million dollars.

A commercial landlord carries a lot of risk and has the largest investment but the tenant often makes better returns

by streetwise | 22nd May 22, 3:00am 1653145242

A timely reminder by Antz. And very good advice at this watershed moment in business history. I've been an exploited commercial tenant a few times in my working life. Bob Jones, who must own half of Wellington's downtown buildings, always swore that industrial and commercial buildings were a far better investment than residential housing, but of course that was some decades ago now. He said it was the better investment because of all those costs to be paid for by the tenant and those built-in mechanisms for relentlessly raising the rent mentioned by Antz....and a few more like having the tenant pay the rates. In a retail complex there were the 'operating expenses' invoiced relentlessly once a month. In fact, it's amazing how I managed to make a living.

It's good to hear someone like Antz on the blog because I'm confident most commentators wouldn't have a clue about what's involved on the cost side of the ledger in running a small or medium-sized business. They are mostly theoreticians and armchair know-alls who have never dipped their toes in the ice-cold challenging waters of running a business.

I sometimes used to wish I had the temperament to become a cog in a corporation....a nice cushy life-time job without all the problems that come with running a business.

by Wrong John | 21st May 22, 2:02pm 1653098554

If we can't fill the warehouses with products maybe we could adapt them for people. There's 20,000 families still waiting for a state house. Maybe a state warehouse would do?