Comparing markets with Australia – what can we learn?

aPRIL- May 2022 Comparing markets with Australia – what can we learn?

As the number of Omicron cases rise, Colliers looks to Australian cities to see how New Zealand’s office, retail and industrial markets could track in the future

Office Sector

Over the past two decades, vacancy rates in Auckland’s CBD and metropolitan office markets have typically followed a similar path with Sydney (5.1mil sqm total inventory) and Melbourne (4.9mil sqm total inventory).

While the past two years have seen vacancy rates rise from cyclical lows in Auckland, Sydney and Melbourne, the Auckland metropolitan market as well as the Wellington CBD have not experienced the same level of vacancy rises in office accommodation, remaining relatively strong in comparison to other markets and by historical standards. ered prime (premium and A-grade) quality space in comparison to 50% to 70% for Auckland, Sydney, Melbourne and Canberra, etc, new development activity will be key to alleviating availability pressures and unlocking the capital’s longterm growth prospects.

Investor demand for core office assets has resulted in yield compression over the last two years. Average prime yields in both Auckland and Wellington have firmed by approximately 50 basis points since the end of 2019 to 5.2% and 5.5% respectively.

While increasing interest rates suggest that yields will ease over the course of 2022 the impact is likely to be limited by the weight of capital which investors have accrued and plan to deploy within the sector.

The strong demand for New Zealand assets has been well illustrated by the recent confirmation that Precinct Properties has agreed to inject five of its properties, valued at about $590 million, to seed a new strategic investment portfolio with the Singaporean sovereign wealth fund.

A further uplift in overseas activity within the market is anticipated later in the year as border restrictions are eased.

Sydney and Auckland’s vacancy rates, which are at 9.0% and 10.9% respectively, have now started to ease from the escalation in vacancy arising from Covid-19.

New ‘back to work’ initiatives in Australia are likely to assist pull vacancy rates downwards and while Auckland’s Omicron wave is upon us now, the Auckland market is expected to also have reached a vacancy peak.

Wellington’s CBD continues to remain resilient, a feature of the lack of high quality stock available and solid government demand for office space. However, with ongoing seismic resilience requirements and only 22% of stock consid-

Industrial Sector

Auckland and Wellington’s overall industrial vacancy rate, both at around 2%, are comparable to Sydney’s industrial vacancy rate, but slightly under Melbourne and Adelaide, with Perth’s industrial market at just over 4%.

Demand and supply pressures are prevalent across Australia and New Zealand, with land supply, cost constraints and a massive boost to demand from online retailing and infrastructure key to the sector’s performance.

With such tight leasing markets and rising costs in NZ, the pressure on rents to increase continue to mount.

While prime rental growth of 3% p.a. in Auckland and Wellington is forecast, the pressure for this to increase at higher rates are increasing steadily as inflation continues to rise.

Despite the disruption which constantly changing COVID-19 related rules and sanctions is having on the economy, New Zealand’s manufacturing sector has expanded for the fifth consecutive month.

The BNZ Business Per-