Vacancy rates for industrial real estate remain low and demand is largely outstripping supply in Auckland, Wellington and Christchurch, says a JLL Research report.
The trend remains particularly pronounced in Auckland, says Daniel Longmire, JLL's senior research analyst who has released the agency's First Quarter 2019 Market Snapshot of the industrial property markets in the three main city centres.
"Available space in Auckland remains highly sought after by occupiers, resulting in a continued downward pressure on vacancy rates," says Longmire.
"After vacancy rates reached 1.7 per cent in in the second half of 2018, it was evident that tenants were struggling to enter into leases for premium or larger properties. This is forecast to persist through 2019, with a slowdown in development activity."
He says it's a similar case in Wellington, with the capital maintaining a relatively flat level of vacancy since the second half of 2017 sitting at 2.8 per cent.
"Movement within the sub-precincts of Wellington was noted, but this did not vary enough to drive an overall shift in vacancy.
"Most notably was a drop in Ngauranga and Grenada North regions, falling from 5.1 per cent to 3.9 per cent, and 4.4 per cent to 2.2 per cent respectively. Vacancy rates are expected to remain at similar levels for the foreseeable future as there are no major developments progressing through the pipeline."
In Christchurch it's a slightly different story, as unlike the markets that have been simmering in Auckland and Wellington for some time, demand is only now catching up to supply.
"Demand for industrial stock of a high quality, modern and well connected nature remains robust, as vacancy rates dropped from 7.5 per cent to 4.8 per cent in the second half of 2018," says Longmire.
"With a decrease in space under construction, demand was able to catch up with the significant increase in new stock built post-quake. However, demand still remains subdued for secondary stock."
Longmire says supply remains slow in all three cities for various reasons – despite the obvious demand for industrial properties.
"While there is a significant amount of development underway, the number of new projects entering the pipeline in Auckland has declined. Current projects underway include a 65,000sq m warehouse and office development under construction for Foodstuffs in Mangere due for completion in the second half of 2020," says Longmire.
"Key reasons behind the dampened supply response in Auckland include inflated land values and rising construction costs. While demand for new stock remains consistently strong, we believe these restrictions will continue to cap new supply going forward, resulting in stable vacancy levels."
Longmire says progress in supply in Wellington is also hampered by constraints in land supply and high construction costs.
"We recorded a net increase of 12,782sq m in the last vacancy survey, which saw minor new build projects completed as well as some refurbished stock returning. Despite an imbalance in demand and supply, there are few projects progressing through the development pipeline.
"Competition for the supply of prime space remains elevated with a majority of the properties reaching completion being pre-leased or absorbed shortly after. Approximately 25,000 sq m of space is being developed across two projects with both at the tendering stage."
Longmire says investor demand in Wellington is focused on quality tenanted assets or those that offer value add conversion opportunities.
In Christchurch, it's a simple matter of the market reaching equilibrium.
"While stock continues to trickle into the market with a number of projects progressing through the development pipeline, supply response has begun to slow significantly," says Longmire.
"We have seen a decline in new projects being added as demand is now largely satisfied and development is mainly conducted on a basis of being built for specific tenants."
Longmore says all three markets are expected to experience stable rental growth over the year to come.