Commercial property values slide but recovery looms
New Zealand’s commercial property sector continues to face headwinds, with values still 10% below their 2021 peak, according to Westpac senior economist Satish Ranchhod (pictured above).
Economic challenges and rising interest rates have dampened activity in recent years, leading to reduced property sales.
The total value of transactions fell to under $6 billion in the year to June 2024 – the lowest level in over a decade and a sharp decline from pre-pandemic highs of $10bn annually.
However, Ranchhod expects conditions to stabilise, with GDP growth forecasted to pick up to 2.3% in 2025 and 2.7% in 2026. Investor confidence is already improving in response to falling interest rates, although the recovery is expected to be gradual.
Office market faces two-tier Demand
The office space sector continues to adapt to changes in business models and workplace preferences, Westpac reported.
The rise of flexible working and remote work has significantly reduced the need for large office spaces, with 9% of advertised jobs now offering work-from-home options, up from just 1% pre-pandemic.
“Even before the pandemic, many businesses were reassessing the amount of space they needed,” Ranchhod said. “That trend accelerated significantly over the past few years.”
This shift has led to a growing demand for premium office spaces with environmental and seismic features, while lower-grade properties face rising vacancy rates. Auckland, in particular, has seen a surge in office development and refurbishment to meet the demand for high-quality premises.
Retail struggles amid economic pressures
The retail sector has felt the impact of rising living costs, interest rates, and changing consumer habits. Retail spending dropped nearly 3% in the year to September, with many households cutting back on dining and shopping.
The shift to online shopping has further reduced demand for traditional retail spaces, particularly in city centers where hybrid working models have limited foot traffic.
While strip malls and central city outlets struggle, large-format stores and shopping malls have shown more resilience by combining retail, dining, and entertainment options to attract customers.
Ranchhod predicts limited retail growth in the short term, but conditions should improve as interest rate cuts boost spending in early 2025.
Industrial sector maintains stability
Demand for industrial spaces such as warehouses and storage facilities remains firm, driven by the rise in e-commerce and improved inventory management strategies among retailers.
While vacancy rates in Auckland and Christchurch remain low, they have begun to edge higher due to increased supply.
Ranchhod noted a slowdown in rental growth for industrial spaces, with significant new developments contributing to eased market tightness.
Rents and yields stabilise
Commercial rent growth has decelerated across all property segments over the past year, reflecting weaker economic activity, Westpac reported.
While rents are expected to lift as the economy recovers, growth will likely remain gradual due to rising vacancies and additional supply. Inflation, forecasted to stabilize near 2%, will also result in smaller rental indexation adjustments.
Yields have firmed over recent years, reversing earlier declines, and now resemble levels last seen in 2015–16. Current gross yields average:
- 5.5% for industrial properties
- 6–7% for office spaces
- 7–7.5% for retail assets
Looking ahead, Ranchhod expects modest declines in yields as interest rates continue to drop. With the OCR projected to fall to 3.5% by mid-2025, the commercial property sector is positioned for a slow but steady recovery.
Outlook: Cautious optimism for 2025
While challenges persist, particularly for retail and lower-grade office properties, falling interest rates and improving investor confidence are setting the stage for a gradual recovery in New Zealand’s commercial property sector.
The coming years are likely to bring renewed demand, though the pace of growth will remain tempered by economic uncertainties and market adjustments, Westpac reported.
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