Record vacancy rates in New Zealand's industrial property market has resulted in a surge of development activity, but the sector cannot afford to relax, says Scott Campbell, national director, industrial and logistics for Bayleys Real Estate.

A ramping up of industrial development activity has struggled to keep pace with demand from tenants and owner-occupiers, meaning that vacancy rates remain very low in many parts of the country.

Despite more than 1m sq m of new industrial premises being consented across Auckland over the past four years, industrial vacancy remains at historic lows of sub three per cent. In Hamilton, the vacancy rate is 2.8 per cent, while in Wellington it's at its lowest level since the last market peak in 2008.

Campbell says this is one of the busiest periods of activity Auckland and other regions across the country have seen. But additional space is being quickly absorbed.

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"Compounding the problems posed by high levels of tenant demand and undersupply is the increase in construction activity across all property sectors. This translates into more tenant demand. A nice problem to have, but still a problem for a sector experiencing such high capacity constraints."

Campbell says the high level of occupier demand is driving investor interest in industrial property.

"Industrial property represented 56 per cent of commercial property sale transactions in 2016 in Auckland, the country's largest market, showing the scale of investor appetite."

The number of locations from which industrial businesses operate has reached its highest level ever, with an employee count surpassing its previous high prior to the global financial crisis.

Considering that 85 per cent of all commercial property transactions in New Zealand sell for $2m or less, industrial property - typically of a lower dollar value than the commercial office and retail sectors - provides a large pool of opportunities, although bidding is competitive.

The consensus view of industrial property was that it was a steady performer, but not as attractive as retail or office property, which tended to provide higher capital growth.

That is no longer the case, Campbell says. Recent figures from the MSCI Property Council Index, which values and tracks a multi-billion-dollar portfolio of commercial property throughout New Zealand, shows that over the past five years total returns (income plus capital growth) from industrial property have averaged 12.4 per cent annually, comfortably ahead of retail (10.9 per cent) and office (10.6 per cent).

The higher yield differential industrial property used to have is also a thing of the past. Bayleys Research's Median Yield Index for Auckland industrial property established in 1988, when the median yield sat at over 10 per cent, has now fallen to its lowest point ever - almost half that figure at 5.4 per cent.

"Indications are that this tight market will continue over the short-term. This means that tenants who aren't pre-planning may be frustrated with the lack of choice. Rental costs will likely increase as a result," Campbell says.

He says that the availability of affordable industrial land will determine the future of the sector.

An analysis of industrial building consents by floor area in Auckland by Bayleys Research indicates they have dipped this year. Development is being hampered by a shortage of land with much of what is available at a price level that makes it difficult for an industrial project to stack up financially. Tougher bank lending criteria have also had a big impact on the development sector.

"However, additional tracts of industrial zoned land being re-zoned and released, especially in growth areas in the north, west and south, may provide some relief," Campbell says.

"Growth enabled by the part operative Unitary Plan will be provided further south of the main established industrial precincts - in areas such as south of Takanini and Drury. This highlights the future direction of Auckland's new heavy and light industrial sector."

The industrial property sectors in Tauranga and Hamilton are also thriving, with both cities being important cogs in the "Golden Triangle" of trade that is developing between them and Auckland; and which will be enhanced by further improvements to road, and possibly rail links.

"With land packages priced around $265 per sq m in the new 60ha Te Rapa Gateway industrial estate alongside SH1 in northern Hamilton, it's not hard to see why businesses are being enticed further down what will eventually be part of the same southern motorway when the 102km long Waikato Expressway is completed in 2021," Campbell says.

Tauranga also has an abundant supply of affordable industrial land. This, in combination with an attractive coastal lifestyle offering and population growth, will continue to attract businesses eastward.

Further south, both Wellington and Christchurch's industrial property markets have, perhaps perversely, benefited from the seismic upheavals they have had to confront. Relocations and storage requirements resulting from earthquake damage, coupled with a strongly performing regional economy, have produced the highest level of industrial leasing activity in Wellington in many years.

Christchurch has benefited from a significant increase in the supply of new industrial premises. Building consents show an average of nearly 250,000sq m of new industrial floor space has been added annually since March 2012, which has included large format warehousing for Cardinal Freight, Mainfreight, and Sorted Logistics. This has helped Canterbury cement its position as the South Island's distribution hub.

"Despite these issues, the attractiveness of owning industrial property will continue, keeping bidding high. Assisting buyers will be the greater selection of stock to choose from over the next year," Campbell says.