There is a real air of optimism surrounding Rotorua’s commercial and industrial property markets.
The local economy is performing well, business confidence is high, tourism is booming, population growth is positive (a reversal of historic trends) and the region looks to be an early beneficiary of the new government’s regional focus with confirmation it will headquarter the NZ Forestry Services.
The above conditions have driven a burst of development activity over the past couple of years with more in the pipeline. Encouragingly, there is a real depth in the type and mix of projects underway and planned covering new high end hotel accommodation, a new $30 million spa facility (Wai Ariki) on the lakefront, the $20 million Trade Central retail development, proposed refurbishment of CBD civic buildings and the development of a number of retirement villages including $20 million Lynmore Rise Village and the addition of 30 retirement villas at Regency Park.
With a growing population comes increasing demand for new housing stock and we expect residential construction activity to gain momentum over coming years. Much of this activity is likely to centre on the eastern side of town around Te Ngae Road including land that was originally set aside for the now scrapped Rotorua Eastern Arterial. This will benefit the retail sector through increased consumption as well as the industrial sector during the build process.
Challenges, however, still remain including how to recycle an excess of older and increasingly vacant CBD office space and, to a lesser extent, pockets of older retail space. More recently, rising labour and material costs for new builds and a more cautious approach by banks to lending could also impact the pace of future activity.
Conditions in the industrial sector remain incredibly tight. A buoyant business backdrop coupled with a general shortage of industrial space and lack of available development land has put increased downward pressure on vacancies. The latest Telfer Young Vacancy Survey (Sep 2017) has overall Rotorua industrial vacancies at just 5.8%, the lowest since 2004. If the closure of the Lumbercube Mill on Vaughan Road was excluded from the survey, overall vacancies would have dropped to 4%.
Industrial markets in West Rotorua and main road locations have shown particular improvement over the past 12 months on the back of strong business growth. However there are now limited options for businesses to expand with a distinct shortage of vacant sites available near the CBD. We expect these tight conditions to continue to prevail in 2018.
Despite some significant areas of land zoned industrial in the Rotorua District Plan, translating this into sub-dividable land available for development remains a challenge. While there is growing interest amongst landowners and developers to subdivide greenfield sites, to date there has been little action on the ground in meeting market demand. This needs to be addressed.
The recycling of industrial sites into higher and better uses, notably along Te Ngae Road, has also added to the challenge. What were previously industrial parcels of land now house complexes such as Motion Entertainment/Lynmore Junction retail (ex SealedAir site) and Redwood retail shopping centre (ex Redwood Holiday Park and Landscape Supply Yard). The transformation away from industrial uses in inner East Rotorua will continue as land acquired for the now disbanded Rotorua Eastern Arterial (REA) is more likely to be used for residential purposes. This covers a large area of land between Te Ngae Road and Lakeside and will put increased pressure on surrounding industrial users to reduce traffic and noise levels.
The draft 2017 Rotorua Spatial Plan, issued by council earlier this year, also points to a long term transitioning of some existing industrial areas to other uses such as residential for Ngapuna and Ngongotaha. It suggests land closer to the airport would be best suited for logistics based industries and Rainbow Mountain and Waipa for heavy industry.
Both owner occupier and investor interest in Rotorua industrial property remains strong. The challenge continues to be finding stock. Current building consents point to limited new supply reaching the market over the next 12-18 months which will ensure industrial yields remain tight. Equally, with vacancies so low, rents are expected to show further growth especially for modern, well located flexible space.
Recent sales include 334 Te Ngae Road Lynmore, a 1.28 hectare site with over 3,000m2² of buildings which has been fully leased with multiple tenants and room to develop more industrial units at the rear. This sold for $2.45 million in October 2016 to R&B Consultants. Also 2.18 hectares of industrial land in Geddes Road sold in May 2017 to a local owner operator who is looking to develop it for their own operations.
After many years of little or no activity the Rotorua office market has been playing development catchup over the past 18 months.
A two tier market remains firmly in place. Demand for A grade space has grown while demand for poorer, seismically challenged space has fallen. The growing oversupply of lower grade space is reflected in Telfer Youngs last Rotorua CBD office vacancy survey, conducted in December 2016, which shows overall vacancies at 18.7%, up from 15.3% a year earlier.
One of the largest commercial towers in Rotorua, the Zen Centre on Arawa Street, is planned to undergo extensive refurbishment to transform it into a much needed 130 room, five star hotel which will be operated by Accor Group Pullman on completion in early 2019.
Encouragingly a growing pipeline of new office projects is providing a fresh face to Rotorua’s CBD, many incorporating the councils “wood-first” policy on exterior finishes. Recently completed projects include:
- The Lakesyde Business Centre on Whakaue Street, stretching to Rangiuru Street, which is split into 3 main buildings over 2 levels and totalling 2,788m2. Tenants include Lone Star and Harcourts on the ground level. The project was completed in late 2016 by TPB Properties who also developed the Redwood Centre.
- Transformation of the former Freedom Furniture building into an office block on Whakaue Street. The redevelopment was completed in September last year and has Tompkins Wake and OPUS as tenants.
- Redevelopment of the former RSA building on Haupapa Street (now called Haupapa House) into A grade office accommodation by Pukeroa Oruawhata in 2016/17. The first floor consists of 400m2 and is leased to Holland Beckett Law. The ground floor has a further 738m2 of space, including café space.
Rotorua Lakes Council has also recognised that many of the civic buildings in the CBD have not been improved for many years and need improvement. These include plans for a $6.5million redevelopment and earthquake strengthening of the Sir Howard Morrison Performing Art Centre. Completion of NZ’s first library and child health hub in the CBD is also expected to occur later this year. Seismic strengthening work is currently being done on the i-Site including replacing the toilets and creating more office space. All these projects are adding a new vibrancy and freshness to the CBD.
Coworking operators have also opened premises in the CBD including The Firestation (1289 Fenton Street) which offers flexible office space and meeting facilities and Digital Basecamp (1132 Hinemoa Street) which has been set up as a collaborative coworking space for digital content creators and tech developers. These shared spaces provide a crucial role in allowing smaller start-up/entrepreneurial groups to grow their businesses and ultimately take up more office space as they evolve.
Council’s 2017 Spatial Plan recognises that the CBD footprint is too large and needs to be reduced with suggestions of encouraging other uses west of Amohia Street and east of Fenton Street such as increased residential development. In order to improve the vibrancy of a more compact CBD the plan also suggests tourism accommodation should move to the centre.
Investment conditions remain steady overall with strongest demand for better quality properties with good tenants and long lease tails. This sector of the market has seen yields firm by around 50 basis points over the year to 7.5-8.5%. With all the recent development activity and increase in supply, rents are generally expected to show limited growth over the next 12 months.
The retail sector remains buoyant. A growing population base, rising visitor numbers and strong local economic conditions are all helping underpin retail spending and growth in the sector. This is most visible in the CBD where shop vacancies have fallen and there is a renewed vibrancy to the city centre. Based on Telfer Young’s most recent vacancy survey, conducted in December 2016, the CBD retail vacancy stood at 12.2%, down from 15.4% a year earlier. Conditions look to have improved further since the survey was conducted especially for prime locations. CBD areas that continue to be a challenge to lease are those in fringe locations, away from the main arterial routes in side street positions.
Outside of the CBD, there has been a wave of suburban development over the past few years. This has led to some short-term digestion issues which we expect will be resolved over the next 6-12 months.
New centres include:
• Redwood Retail centre (4,500m2) on Te Ngae Road which opened in 2013 with 21 tenancies and has subsequently been strata titled.
• Old Quarry Road Shopping Centre (6,253m2) on the corner of Old Quarry Rd and Fairy Springs Rd which opened in 2014 with 10 tenancies
• Lynmore Junction (27,700m2 via staged completion) including the hugely popular Motion Entertainment complex (6,300m2) which has seen around 400,000 visitors in its first year of operation – double what was expected. The complex includes a number of all-weather entertainment activities such as ten pin bowling, mini golf, trampoline park, timezone games and Chipmunks playland as well as convention centre facilities on the upper level. The balance of Lynmore Junction includes a mix of retail offerings including a bakery, restaurants, dentist facilities and gym. Stage 3 is currently being marketed.
• Fresh Choice Supermarket on 554 Te Ngae Road which opened in June 2017 encompassing a 1,175m2 supermarket with plans for 250m2 fast food in the pipeline
The largest retail project currently underway is the new $20million development on the Trade Central site on Amohau Street next to Mitre10 Mega. The project will see a central K Mart entrance leading to a 2,000m2 store at the rear of the site and a further 10 retailers (100-200m2 each) along the shop front either side of the Kmart entrance. Two larger stores (1,000m2 each) will also be built next to Mitre10 Mega with Bed, Bath and Beyond confirmed as one of the tenants. Most of the other stores have been leased and are planned to open before Christmas. The project is being done by Pukeroa Properties No. 2, a wholly owned subsidiary of Pukeroa Oruawhata Trust.
Yields for prime retail showed further firming over the past year, reflecting strong investor demand. Rents for both prime and secondary grade retail have remained relatively flat.