The changing face of commercial property in New Zealand

As economic shifts and evolving behaviors reshape markets, New Zealand’s commercial property sector is undergoing significant changes.

Like housing, commercial property has faced challenges from high interest rates and broader financial pressures. However, unique trends and structural shifts are redefining the outlook across different segments, Kiwibank reported.

From boom to bust

Commercial property enjoyed strong performance through late 2021, with values rising 18% year-on-year to September. But by early 2023, values had fallen nearly 10%, reflecting reduced investor appetite and widespread economic uncertainty.

According to Sabrina Delgado (pictured above), Kiwibank economist, the downturn extends beyond monetary policy.

“High interest rates have crushed investor appetite. Tough financial conditions have forced many businesses to downsize or close shop entirely,” Delgado said.

Additionally, shifts driven by the COVID-19 pandemic, such as hybrid work and online shopping, have transformed demand for certain property types.

Diverging trends in commercial property sectors

Not all segments of commercial property are faring equally. Offices, retail, and industrial spaces are experiencing distinct trends:

• Offices: The rise of hybrid work has shifted demand to high-quality, “prime” office spaces with amenities and sustainability features. Secondary offices face higher vacancy rates and declining values as businesses downsize or prioritize better work environments.
• Retail: Retail properties have struggled with increased vacancies, declining rental growth, and reduced foot traffic in central business districts (CBDs). The surge in online shopping during the pandemic has further weakened demand for physical retail spaces.
• Industrial: The industrial sector is thriving. Warehousing and logistics properties have seen demand soar due to e-commerce growth. Limited supply has driven rental increases, with industrial rents rising 30% since COVID, including a 20% surge in the last two years.

Location shapes commercial property performance

Kiwibank analysis showed that location plays a crucial role in commercial property performance:

• Auckland dominates sales but faces challenges in the CBD, where retail vacancies remain elevated at 10%, compared to a pre-2018 average of 4%.
• Wellington benefits from government activity and limited land availability, keeping industrial demand strong but office vacancies steady.
• Christchurch has achieved a balanced market, with stable prices and low vacancies due to its post-earthquake rebuild.

Kiwibank’s insights on the commercial property outlook

Despite current struggles, signs of recovery are emerging. Rate cuts by the Reserve Bank (RBNZ) have already lifted investor confidence, with Colliers reporting a return to positive sentiment.

However, structural challenges remain. Retail properties in CBDs face ongoing pressures, while industrial spaces are poised for continued growth. Offices will likely see increasing competition for high-quality spaces, leaving lower-grade properties in need of reinvention, Kiwibank reported.

Read the Kiwibank analysis in full here.

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