Key investment sector - commercial property in Auckland's CBD.
Key investment sector - commercial property in Auckland's CBD.
Investment returns from commercial and industrial property are forecast to bounce back strongly in the coming years but are unlikely to reach the highs in previous cycles.
Zoltan Moricz, CBRE’s Auckland-based research executive director, said a four-decade chart which forecast changes through to 2027 gave a snapshot ofwhere the Auckland market had been and where it could be heading.
Data was compiled from 1987, forecasting another four years ahead, to show what’s happening.
Auckland market - looking back and forward, measuring returns. Graphic / CBRE
The chart for Auckland shows aggregate base scenario forecasts for income returns and capital returns due to rent and yield changes.
The most spectacular returns of the past 40 years were in the boom-time early 1990s.
One of the biggest downturns was this decade when interest rates rose sharply and the economy slumped, pushing capital returns based on yield into negative territory.
But the chart forecasts total returns - income, capital based on yield and capital based on rent - rising this year and through to 2027.
As the rate of yield-driven capital return loss moderates in 2023, helped by favourable rent growth, total returns improve this year.
Zoltan Moricz, of CBRE, released the survey of 20 financers, telling how they view the property sector.
“We are close to the top of the current yield cycle although we expect selling pressure on some vendors to intensify over the next six months. With the gradual moderation of interest rates in 2024, in our base scenario forecasts yields remain flat to slightly increasing, depending on how favourable underlying occupier market dynamics and investor sentiment are at the submarket level. The lack of rent growth forecast next year and some further cap rate expansion could result in negative capital returns and relatively modest total returns,” Moricz said.
But by 2025 both rents and yields are forecast to contribute positively to capital returns.
In 2026/2027 total returns are forecast to reach double digits. Average annual total returns over the 2023-2027 period are forecast at 9.4 per cent, of which capital returns contribute 2.1 per cent.
In the past two years, the best rent growth came from industrial and the top end of the office market, he said.
That is premium in the CBD, grade A in the non-CBD and industrial property.
“We expect that in 2024 the fortunes of the office and industrial markets will diverge for net effective rent growth. While these two sectors of the office market will be relatively insulated from the impacts of new supply and are expected to benefit from ongoing occupier demand, industrial will be more exposed to rising vacancies,” Moricz forecasts.
A CBRE report out towards the end of last year showed vacancy rates in the industrial sector “remained below 1 per cent”. That compares to a 16 per cent vacancy rate in non-CBD offices and 8 per cent for CBD offices.
Graeme Hart, pictured wife Robyn in Amsterdam with his new boat in late 2023, has invested in the industrial property sector recently. Photo / Instagram
Moricz said in 2024, recent strong rental pressures are forecast to dissipate as construction costs stabilise, land values ease, and yield-driven pressures on economic rents reverse as interest rates peak and start moderating next year.
Landlords would be more willing and able to offer more competitive rents, most likely through higher incentives.
The leasing market will become more competitive in 2024, he says.
But cyclical adjustments in the industrial market tend to be relatively quick and when prime industrial rent growth resumes, CBRE forecasts it will be comparatively high.
“In aggregate, we expect large format retail, premium grade office, and prime industrial to lead rent growth in the next five years,” Moricz said.
Hybrid working has become widespread, adopted by 94 per cent of organisations CBRE has sent its market sentiment surveys to.
More than half have their employees in the office three days during a typical work week, and 15 per cent two days a week. Office attendance averages 3.2 days a week, but it varies widely based on industry, organisation size, and where decision-making sits, CBRE found.
Decisions on the nature and extent of hybrid working are typically made at the middle management and individual team level, but senior leadership influence on hybrid working practices is expected to increase.
The net result of this shift will likely be a reduction in remote working, with 21 per cent of organisations looking to decrease the extent of hybrid working during the next two to three years compared to 2 per cent expecting to increase it, CBRE said.
Anne Gibson has been the Herald’s property editor for 23 years, has won many awards, written books and covered property extensively here and overseas.
