Activity rekindled in development market.

With occupancy levels continuing to firm across Auckland's industrial precincts, tenants wanting to relocate are facing a reduced range of choices, says John Church, commercial and industrial general manager for Bayleys Real Estate.

Church says falling vacancy rates mean it is becoming noticeably harder for tenants to find suitable existing vacant premises, particularly distribution companies wanting large-scale warehouse premises offering clearspan, high-stud space.

He says this is rekindling activity in the development market, particularly for design build projects for pre-committed tenants. Church says the correction in industrial land prices that occurred during the downturn in the market, coupled with historically low borrowing costs, have made new development projects more viable, although feedback from the sector is that margins are tight as tenants remain very cost focused. However, he says the market has moved to the point where new developments can be just as cost effective as existing premises for tenants.

Church says the advantage for tenants of the design-build approach - or "built-to-suit" as it is known in the United States - is that buildings are designed "from the inside out". The internal configuration of the building is worked out first - generally based around material handling and storage requirements - and the external structure is then developed around that, minimising space wastage.


"Design-build projects also generally build in flexibility for future expansion, either upwards through increasing the height of the warehouse racking system or outwards by designing external walls that can be easily removed," says Church.

"However, they do require a tenant to lock into a long-term lease and they also involve a greater degree of forward planning. For example, we have a tenant at the moment wanting to move into a large amount of space by Christmas, so design build is obviously not an option for them."

Jamsheed Sidhwa, a supply-chain industrial property specialist with Bayleys Manukau, says larger tenants looking to reposition their businesses are increasingly faced with the option of either having to refurbish existing buildings or design-build to their needs. In one recent lease he negotiated, it will take nearly six months of modifications for a relatively new building to become operationally compatible with the tenant's requirements.

"While new warehouses typically have a 10- to 12-month development timeframe, the design-build process means ending up with a building that meets the client's needs in every conceivable way. However, when it comes to modifying an existing building the old adage that 'it is difficult to put square pegs in round holes' invariably applies to a certain extent."

Sidhwa says in a 6500sq m lease he concluded on a road front greenfield site in Wiri early this year, a comprehensive evaluation showed existing premises would not have optimised the tenant's business operation and design-build came though as the preferred option.

"Starting with a blank building canvas gives the ability to build in operational solutions from the ground up for every aspect of the client's business to enable it to perform better. "Organisations that go down the design-build track typically report improvements in supply-chain efficiencies, day-to-day operations management, client interface, environmental efficiencies and overall staff morale."