Industrial market on the up: survey

An industrial-led recovery in the commercial market is showing up in stabilising vacancy rates and yields, with renewed interest by investors. Photo / Supplied

Industrial property in both the provinces and cities is leading a tentative commercial market recovery, according to a national survey of the industrial sector by Bayleys Research, published in Bayleys' latest Total Property magazine.

Senior research analyst Ian Little says the survey shows vacancy rates and yields are stabilising for better-quality property, rental falls are flattening out and a substantial correction in land values is renewing interest from developers and investors.

"Most industrial precincts experienced increasing vacancy rates during 2008 and 2009 as companies contracted and looked to shed surplus space," says Little.

"The last few months, however, have seen these rates stabilising as a more active, although still relatively subdued, leasing market has been balanced by a slowdown in development, reflected by a marked decrease in the rate of land absorption."

The uptake of land in two of the country's largest industrial precincts, Manukau City and Christchurch, has fallen to the lowest levels ever recorded in the council surveys. Manukau's 2010 survey shows an uptake of only 4.7ha over the year compared with an average annual uptake of 45ha in the past 15 years.

While 2010 figures for Christchurch are not available, just over seven hectares of land were absorbed in both 2008 and 2009, well below the 15-year annual average of 23ha.

"The substantial decline in industrial development has, relatively quickly, brought a greater balance between levels of occupier inquiry and space available," says Little.

"This is due to the fact that the 'development tail' is much shorter in industrial construction than with commercial office development, where significant projects remain underway long after the downturn in occupier requirements becomes apparent."

While development activity remains subdued, the latest Bayleys Research survey has identified a renewed interest in land being exhibited in many areas as developers and investors look to take advantage of significantly lower land values and position themselves for the next uplift in demand for new space.

Capping of vacancy rates has also resulted in stabilising rental levels, which had been under downward pressure over the past two years.

Little says this stabilisation is also being helped by a pickup in leasing activity, with some Bayleys offices reporting a noticeable increase in inquiry particularly for smaller industrial units up to 300sq m.

In the sales segment of the market, Little says owner-occupiers have been active for the past year or so, with an increased supply of empty buildings and a fall in both values and interest rates stimulating activity.

"While vacant buildings were selling at a relatively slim discount to tenanted properties last year, the discount gap appears to have widened this year, offering businesses good buying opportunities."

Sales evidence suggests that yields for investment property, particularly for limited offerings at the high-quality end of the market, have levelled off after softening since the onset of the recession in 2008.

The Bayleys Research survey has revealed that industrial yields as low as 6.5 per cent have been achieved in areas such as Queenstown and Taupo, where supply is very limited, while the majority of precincts show a range of between 7.5 per cent and 8.5 per cent at the prime end of their markets.

While the indicators point to the fact that the industrial sector is leading the post-recession recovery within the commercial property markets, the speed and strength of that recovery will be dependent on how the overall economy performs.

"While a majority of economic commentators and the Reserve Bank say recovery will continue to be weak in the short-term future, the longer-term outlook remains positive with the economy tipped to gather momentum in 2011 in the build-up to the Rugby World Cup," says Little.

"This recovery should be accompanied by increased business formation and expansion, resulting in greater requirement for space. This will see companies soaking up their existing spare capacity and in turn looking to lease additional space, reducing vacancy rates and further supporting rental levels and yields."