Demand for space declines in the office, retail and industrial sectors as commercial sentiment sours

Property / news

Commercial property sentiment in New Zealand is the third most negative in the Asia-Pacific - only China and Hong Kong are worse

26th Apr 24, 10:15am by Greg Ninness

New Zealand's commercial property sector continues to face negative demand, with general sentiment being the third most negative in the Asia-Pacific Region, according to the Royal Institution of Chartered Surveyors' (RICS) latest Commercial Property Monitor.

The international survey, which measures commercial property demand around the world, found demand for commercial property in NZ declined between the fourth quarter (Q4) last year and first quarter (Q1) this year.

"Industrial, office and retail have all seen a further fall in occupier interest - as such, availability has risen," RICS said in a summary of the survey's findings.

It found overall commercial property sentiment was strongly negative, much more more so than in Australia, while China and Hong Kong were the only Asia-Pacific countries surveyed where sentiment was worse. (See second graph below).

Repurposing office space was still a feature of the market but at fairly low levels, with 79% of respondents reporting modest levels of repurposing, and 21% reporting no repurposing taking place, while downsizing was still a major feature of the office market.

A slim majority (52%) of respondents said more occupiers were looking to downsize their office space, while 14% said there had been no change and a third said downsizing levels had decreased.

As would be expected in a soft market, the biggest falls in demand and value had been in the second and third tier properties that were not considered prime.

"Quality is a key issue, as are funding and interest rates," the RICS said.

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37 Comments

by NZGecko | 26th Apr 24, 10:22am 1714083730

Enter major CRE crash 2.0 into NZ.

Yes we can again beat the USA.....where its CRE is already staggering on the lower ledges, below the cliff.

by 1689 Baptist | 26th Apr 24, 11:24am 1714087451

Not only is the economic slowdown affecting commercial real estate, but also cultural shifts.

Working from home is not nearly as restricted as it once was. Result, less demand for office space.

Online stores with home delivery are reducing demand for retail and therefore retail space.

The conglomeration under giant organisations like Amazon will see less demand for warehouse space.

Even movie theatres are closing down as people netflix at home instead.

I do not foresee it going back to what it once was. We might even start seeing shopping strips bulldozed or repurposed for residential in the next ten years.

by Blackdog | 27th Apr 24, 7:50am 1714161020

And people moving out of big cities, a house on land is better value than an urban kennel

by Jesse1 | 27th Apr 24, 11:00am 1714172408

I think on a per capita basis there will be a reduction of retail but with a growing population and there still being a desire by many to go to shops, there won't be an actual decline. I think it would have already happened by now if it was going to decline and they are still opening malls. Some town centres are declining but that's usually because new malls with parking are providing a better experience.

Office space will have some excess capacity for a while due to a dramatic cultural shift but that will still be taken up overtime and the per capita office space will be forever lower.

by agnostium | 28th Apr 24, 3:22pm 1714274573

The new malls ban the parking and cars anywhere near the shops that's what improves the experience. You park on the periphery and walk.

by J.C. | 26th Apr 24, 12:21pm 1714090880

I've thought it was interesting to post examples of the CRE apocalypse in North America and in other countries (some of the capital destruction is wild) while also trying to show the potential impacts on banks.

More than a few people have suggested that NZ is different and our CRE sector is immune from any apocalypse. I'm open minded and accept what they say. And anecdotally, commercial rents are even increasing in places like Raglan.

Having worse demand for CRE than Japan is an eye opener. Word at the water cooler is that Japan is an economic basket case while we've just experienced a few scratch wounds.

by ChrisOfNoFame | 26th Apr 24, 1:07pm 1714093672

"Word at the water cooler is that Japan is an economic basket case while we've just experienced a few scratch wounds."

A famous Monty Python scene springs to mind.

by mfd | 26th Apr 24, 4:57pm 1714107450

I've been making that argument based on occupancy rates of the listed REITs. Maybe they don't reflect the whole market, but they give absolutely no sign of the huge vacancy rates seen in other countries. They are still suffering asset value destruction from higher interest rates, so the question is whether there is enough of that priced into current share price, or much more destruction to come.

For example, ARG reported an annual 5% revaluation loss today, but last reported an occupancy rate of 98.4%. trading on a 25% discount to asset value with about 36% gearing suggests another 15% or so fall in variations expected, or some other pain still to come.

by JamesM | 26th Apr 24, 5:55pm 1714110929

Hi MFD I think I can explain this.

As a listed property stock the share price and therefore market value of ARG can adjust immediately.

Valuations on the other hand are a different matter. The large valuation firms are typically the larger commercial real estate agencies (JLL, Bayleys, Colliers, CBRE) who all derive their income from commercial property owners. These Valuers know that if they come up with a value below ARG’s expectations they will get fired and ARG will retain another firm who will give them a better number.

In order to prevent this happening they will typically work with landlords to slowly walk back valuations over a longer period of time. Investors in the know however are able to determine a more appropriate value via the share price.

In short valuations are often subjective, backwards looking and in some cases not worth the paper they are written on.

by NZGecko | 26th Apr 24, 7:49pm 1714117776

So the latest valuations are just rubbish (massaged higher) and the actual market (us, investors) knows the truth and pays appropriately.

Just like the debt rating agencies during the GFC in the US......all BS. Just doing their best to get paid and help the insiders exit and forestall the inevitable.

History is a great teacher, just a shame, most don't take this class!

by Speedmax | 27th Apr 24, 12:15am 1714133732

Don’t listen to the water cooler too much

by Yvil | 26th Apr 24, 12:10pm 1714090213

I can only reiterate my views that CRE will, IMO, be the catalyst for the next downturn. Vacancies is one thing and it is indeed bad, but the higher yields for valuing CRE (due to the higher interest), is where the real problem lies. Many CRE have not been repriced (down) properly yet. Banks can turn a blind eye to CRE being under water as long as cashflow pays the interest on the mortgage. When cashflow is insufficient, due to vacancies, banks will start calling in their bad loans, these will in many cases not cover the debt outstanding.

by JimboJones | 26th Apr 24, 12:17pm 1714090635

Who will fail first? Oyster? Kiwi? Goodman?

The smart ones have been developing high density residential near their commercial to boost demand. But is that demand enough, and has the pushed their debt too far?

by Yvil | 26th Apr 24, 12:37pm 1714091825

I think private investors will fail first, before, before institutions. I know a few, luckily they have done very well in the past and they have a nice buffer. Said buffer is reducing by the month though.

by K.W. | 26th Apr 24, 1:04pm 1714093498

Correct. Most of the 2nd and 3rd tier stock is held by unlisted funds, and there is a high number of single asset funds out there as well. Any drop in vacancy and cashflow and these funds have no buffer. Listed funds have a more diverse asset base, and can usually weather a drop in vacancy across the portfolio, whilst being able to sell assets to shore up gearing levels without being a distressed seller.

by Mr Ed | 26th Apr 24, 5:06pm 1714107973

Listed Funds employee? How "diverse" are their assets? Not very. A similar fate awaits.

by CN - new | 26th Apr 24, 3:15pm 1714101338

Capital raising activities to deleverage the balance sheet. Some commercial property owners are in negative equity.

https://www.nbr.co.nz/property/october-deadline-for-maat-capital-raise/

https://www.nzherald.co.nz/business/ellerslie-building-investment-schem…

"Auckland property investment company copped an auditor’s warning for borrowings exceeding assets by $13.9 million, breaching its covenants."

by CN - new | 26th Apr 24, 8:12pm 1714119146

Expect more stories to come.

https://www.nzherald.co.nz/business/nido-investors-tell-of-heartbreak-a…

Property promoters will tell investors that real estate investment is safe.

by Mr Ed | 26th Apr 24, 1:19pm 1714094354

Syndicators like Oyster are already in trouble. Property syndication was always an accident waiting to happen. A new JBL..

by KBKIWI | 26th Apr 24, 3:21pm 1714101683

Kiwi only has a few office properties left, and hardly any exposure to government sector - so they will be fine.

The biggest part of commercial property that is downsizing is government departments, so any company with serious exposure to Wellington office property is probably the most at risk.

by J.C. | 26th Apr 24, 12:20pm 1714090825

I'll come in and bat for you and your beloved property bubble Dr Y. The argument could be made that the commercial apocalypse doesn't really apply to SMEs and is being seen more in large-scale corporate property.

by Yvil | 26th Apr 24, 12:38pm 1714091938

When you speak about SMEs, you seem conflate commercial businesses and CRE owners. The latter is the subject of this article, JC.

by J.C. | 26th Apr 24, 1:02pm 1714093325

Not what I'm saying Dr Y. A corporate office property has different demand drivers to a smaller-scale property used for business such as panel beating.

Given that the corporate sector in NZ is relatively small, the argument can be made that the SME sector better defines the CRE property sector.

I'm batting for you, not against you.

by JimboJones | 26th Apr 24, 12:13pm 1714090384

When they strap us to a bed and feed us intravenously while entertaining us with a virtual AI world called the Matrix they will just need a few warehouses. Or they could repurpose the old caged chicken farms.

by Property Leader | 26th Apr 24, 12:30pm 1714091432

A few years ago I thought about repurposing to short stay. The tunnel vision council planners soon scared me off. Their lack of business skills quickly showed when they chanted their rule based mantra. Luckily I found a legal drug (vape) distributer to take the place. With 30 years of hindsight I should have stuck with residential.

by K.W. | 26th Apr 24, 1:12pm 1714093933

NZ - the land of liquor stores, vape shops, pawn shops, op shops, and ethnic takeaways. All designed to absorb the 250,000 unskilled immigrants we keep importing each year. We are 15,000 people per year short of the skilled professionals that businesses need to expand and grow, and for productivity to increase.

by RickStrauss | 26th Apr 24, 4:21pm 1714105262

New Zealand does sometimes appear to be on the road to resembling a developing country (devalued work, overvalued assets, gated subdivisions), but I wasn't expecting to see the wide availability of short-stay hotels quite yet.

by K.W. | 26th Apr 24, 1:07pm 1714093674

In addition to the global CRE concerns, NZ has the added problem of the costs of complying with earthquake strengthening standards. Just to pour oil on the fire.

by J.C. | 26th Apr 24, 1:26pm 1714094767

That sounds like a bit of the ol' inferiority complex. California and Japan also need to content with compliance costs for earthquakes.

by K.W. | 26th Apr 24, 3:09pm 1714100977

Are those countries currently running a programme that says your building must be upgraded immediately or everyone has to vacate the building? The problem is NZ has only recently imposed the requirements (2017) and there is a 10 year deadline to find the funds and complete the work. All while Covid just removed the ability to do anything for 4 of those years. Now there is only 3 years left and building owners are dealing with higher interest rate costs, and lower rental income. So there is no money to do anything.

by J.C. | 26th Apr 24, 3:29pm 1714102163

In the case of Japan, I'm sure they're somewhat more advance in earthquake proofing new builds.

by legrandsoir | 26th Apr 24, 4:08pm 1714104497

An architect told me that NZ is only country that has passed a law requiring the retrofit of earthquake proofing to all buildings. Engineers are absolutely creaming it.

by Speedmax | 27th Apr 24, 12:27am 1714134421

You don’t think that strengthening buildings at risk of unforeseeable collapse is a good idea?

by Mr Ed | 26th Apr 24, 1:12pm 1714093958

The German office market fell 21% in Dec

by J.C. | 26th Apr 24, 1:35pm 1714095349

Came up on the radar this week about Mitsui Fudosan, major commercial and residential property developer in Japan and globally. Stock price up 43% in the past 6 months and 78% in the past 12 months. Going great guns because of Japan's continuous development and renewal.

by JamesM | 26th Apr 24, 4:42pm 1714106569

Interesting article. Firstly I should disclose that I have worked in the CRE space in NZ and offshore for 30 years.

In a professional capacity I act on behalf of corporate occupiers (tenants) but personally invest in commercial property and receive income as a landlord.

The RICS survey is interesting as it is landlords and landlords agents who are surveyed not tenants. I am surprised it is as negative as it is given the respondents. On the flip side given that I represent numerous tenants I can confirm that most are looking to right size allowing for ‘work from home’ and some staff reductions. Our experience is that this reduction is on average around 15-20%. Not catastrophic but certainly not insignificant.

Whilst I think values still need further adjustment downwards I don’t think the market will ‘crash’.

Those who I think will struggle are-

Syndicators. Oyster, Centuria, Mackersy, Silverfin etc

B-C grade office owners

Any investor geared at >50% based on 2023 values

by KH | 27th Apr 24, 10:25am 1714170347

I leased a second rate first floor office on State Highway 1.

I recall standing in the downstairs door "negotiating with the landlord about renewal. He wanted more money. "valuations". Blah blah.

I said from where I stood I could eyeball six first floor offices which had been empty sometimes for years. Landlord was unrepentant.

We moved, purchased a beautiful Art Deco house for an office. Main motivation was the whole commercial landlord thing worked on fantasy valuations and not the market. And absurdities like ratchet clauses.

The office we left was vacant for five years plus. As were most of the other six.

The "valuations" thing is Fantasyland. Weird.