Industrial market on a roll

By COLIN TAYLOR

From being the Cinderella of property markets a few years ago, industrial property has turned into the belle of the ball.

The latest survey by CB Richard Ellis reveals that the overall Auckland industrial vacancy rate to the end of December 2003 was just 3.5 per cent, or 250,000sq m. Six months earlier it was 4.1 per cent or 293,000sq m.

This compares with a similar survey showing an overall vacancy rate of 11.9 per cent for city office buildings two weeks ago and a 15.7 per cent vacancy rate for C grade fringe CBD buildings.

In contrast, the vacancy rate for industrial property in Otahuhu is at a remarkably low of 1.8 per cent - the lowest vacancy rate of 11 industrial precincts monitored. The vacancy rate is highest in Airport Oaks, at 6.4 per cent, but that is still low compared to other commercial property sectors. Improvement has been strongest over the past six months in Mt Wellington, Penrose and Otahuhu.

A strong New Zealand economy, continued consumer spending and high levels of immigration into Auckland from other parts of New Zealand and abroad were among the factors driving the demand for industrial property said Derek Harries, Associate Director Industrial Services for CBRE.

Warehousing, freight forwarding and transportation companies have accounted for much of the demand. Several large Australian logistics companies that weren't on the scene a decade ago are now "taking up huge amounts of space".

"A key indicator for the industrial market is the number of extra containers coming through the Ports of Auckland and Tauranga. All these containers and the imported products inside them have to be put somewhere," Harries said.

He said overseas and domestic immigration was a major growth factor in the Auckland region.

"If you have 30,000 and more people a year coming in an area, it has a major effect on the need to service that increased population," he said.

"You just can't get over the fact we're not making any more land. While you have strong demand and a decreasing pool of land - it becomes a simple supply-demand equation."

Zoltan Moricz, the director of research, Australia & New Zealand, for CBRE said the lack of prime buildings available for occupation had been exacerbated by the low level of spec buildings built over the past few years.

"Developers have been generally risk-averse and focused on design-and-build projects and on a pre-lease basis. Very few projects have been undertaken with a developer facing the prospect of having a vacant building and no tenant on completion.

"If the present capacity constraints in the economy are to be alleviated, and if more space is to be provided by developers, rentals will need to increase for spec buildings to proceed."

Moricz said the varying sizes of industrial precincts, ranging from Otahuhu at 184,000sq m to Penrose at 1.6 million sq m, could distort the true situation in regards to basing available industrial space on percentage rates.

"Taking relative sizes of the precincts into consideration, Mt Wellington, Penrose and East Tamaki account for over 60 per cent of the total industrial vacant stock in Auckland," he said.

In terms of quality, the vacancy rate for Grade A buildings has improved and continues to be the lowest. Grade B deteriorated in the second half of last year and is now the sector with the highest vacancy rate. Grade C and D buildings generally built before 1980, are showing improvement.

The trend in the office market of tenants upgrading from secondary to prime buildings is also mirrored in the industrial sector, although many occupiers in the lowest-quality buildings continue to turn over steadily, without much upward movement to better-quality premises.

While there has been some increase in rental rates, this is still lower than might be expected given the buoyant market conditions.

Official figures suggest building costs have risen about 4 per cent over the past year, but developers maintain that their actual costs have increased by 10 to 15 per cent.

CBRE research indicates prime industrial rent appreciated by 4.3 per cent during 2003 but over the same period land values increased by 17 per cent. In areas such as Airport Oaks, land values have increased from $100/sq m 18 months ago to close to $140/sq m today and in Mount Wellington, where land values have moved from $150 to $200-plus a sq m (if land is available), rental levels have not risen proportionally.

Traditional "sleeper suburbs" are also starting to move. Areas such as Rosebank Road and the Wairau Valley have shown a strong demand for buildings that can be redeveloped and reconfigured. Similarly areas such as Roscommon Road in Manukau have seen increased activity over the last six months.