Vacancies Remain Super Low
The NZ economy put in a stellar performance last year. GDP grew by an estimated 3.2% for the 12 months to December 2014. Domestic demand remained strong. Investment grew at over 7% while annual consumption growth was in excess of 3%. Unemployment is sub 5.5% and business and consumer confidence remain buoyant despite being off recent highs.
Reflecting the strong economic drivers conditions within the Auckland industrial market are now the tightest they have been for at least a decade. Supply is simply not matching the current high levels of occupier demand. Development activity is improving but not fast enough and is being hamstrung by rising build costs.
Bayleys Research latest annual industrial vacancy survey shows overall vacancies in Auckland falling to a super low 3.6% at January 2015 from 3.8% a year earlier.
The survey covers the Airport Corridor, Wiri, Penrose, Mt Wellington, Rosebank Road, East Tamaki and the Albany Basin. Vacancies showed the steepest declines in Airport and Albany Basin precincts. They remained relatively static in East Tamaki, Rosebank Road, Penrose and Mt Wellington. Wiri was the only precinct that showed a noticeable increase in vacancies to 6.1% from 5.0% a year driven in large part by PBT Couriers vacating 14,910m2 of space from 21 Hobill Ave.Leasing conditions in East Tamaki are the tightest they have been for 21 years with little, if any, space available in the smaller 100m2 to 200m2 range. Tenants are finding it next to impossible to compete with owner occupiers who are paying record prices to secure premises and have the ability to spread the cost over 10 to 15 years of occupation. Equally smaller to medium sized developers are being pushed out of the market due to a lack of scale and the high cost of construction. Crippling council charges relating to service connections especially for water are another major obstacle. The upshot is that a few, larger developers such as Goodmans (Highbrook Business Park) and Auckland Airport (The District precinct) who have land banked large tracks of land for many years are controlling supply.
One of the largest leasing deals at the Airport precinct over the past 12 months was Monidale Freight Services entire occupation of the recently constructed 76 Montgomerie Road totalling 11,343m2.This complements space they already leased last year from Kuehene and Nagel at nearby 94 Montgomerie.
The slight uptick in vacancies in Mt Wellington masked numerous smaller movements amongst occupiers the largest being Harley Davidson taking up 2,338m2 at 521 Mt Wellington, while Instant Access vacated 2,595m2 at 104 Carbine Road.
Yield compression at extreme levelsIndustrial yields continued to firm over the last 12 months with the Auckland median now sub 7% at 6.9%. This is the lowest level recorded by Bayleys Research since the time series was created in 1988 and reflects to a large degree the current hunt for yield by investors in an abnormally low interest rate environment.
The current skinny risk premia between Auckland industrial yields and 10 year government bonds shows just how rapidly risk is being reassessed by investors. Whether there is further yield compression or a levelling out will depend very much on the future direction of interest rates. In the short term at least, interest rates look set to remain ultra-low. NZIER’s latest forecasts suggest a gradual grind higher over the next 12-18 months.
While the growth rate of the New Zealand economy is likely to slow over 2015 it should remain well above trend at around 3%. High levels of construction activity, low interest rates, rising house prices and strong migration-led population growth should underpin this growth and more than off-set the risks of lower dairy prices, dry weather and softer Chinese demand. Unemployment is expected to remain low with NZIER consensus forecasts pointing to sub 5.5% over the next two years. The manufacturing sector has now been in expansion mode for 28 consecutive months according to the BNZ-Business NZ latest PMI survey and despite a surprising drop in the level of expansion in January 2015, four of the five seasonally adjusted main diffusion indices remain above 50, signalling further expansion. Capacity utilisation levels remain well above long term averages and as an extra kicker the sharp drop in fuel prices over recent months will also act as a huge boost to the transport and storage sector.
Given the positive economic backdrop for 2015 Auckland industrial property should put in another solid performance. Super low vacancies across the key Auckland industrial precincts will place greater upward pressure on rents. Equally, a combination of continued strong investor demand and a shortage of investment grade industrial property will ensure the tremendous yield compression already seen will be maintained. Looking further out the new road and transport infrastructure currently underway should act as a major growth catalyst for further industrial property development in Auckland.