Tauranga is humming. Confidence is high as the local economy reaps the benefits from multiple growth drivers. These include continued population growth, a booming construction sector, a strongly performing agricultural sector and record trade volumes and cruise ship visits through the Port of Tauranga.
These drivers look set to remain in place for some time and are having a very positive impact on local economic activity which, in turn, is feeding into additional business growth and jobs creation leading to increased occupier demand for commercial and industrial space. This is reflected in elevated levels of development activity within various non-residential sectors.
Conditions are particularly tight within the industrial sector where vacancies have hit historically low levels and upward pressure on rents is intensifying.
Investment demand is equally strong with local investors having to deal with increasing competition from out-of-towners. Since 2012 annual investment sales have averaged circa $210 million per year with a spike in activity over the 2015-2017 years. This was driven by a combination of increased sales levels and the sale of a number of high value institutional grade properties. These included the new Trust Power building (108-125 Durham St) in 2015 for $41.2m and 306 Cameron Road in 2016 for $41.5m. The reduction in sales in 2018 is more a reflection of a lack of stock than any reduction in underlying demand.
Yields for better quality space remain tight across all the major sectors. Industrial property, in particular, has seen a further significant 50 to 100bpts tightening in yields over the past 12 months for both prime and secondary assets. Prime industrial yields now range between 4.5% to 5.5%, tighter than either office or retail.
Industrial…in the sweet spot
The most recent Bayleys Research industrial vacancy survey for Tauranga shows that conditions remain tight across all the major industrial areas. As at 3Q2018 the overall vacancy rate was a very low 2.4%, down from 4.4% a year earlier. Conditions remain tight across all key industrial precincts with Greerton recording the lowest vacancy at just 1%.
Tauriko saw vacancies rise marginally due to the completion of a few speculative developments, mainly those with multiple smaller strata units, coinciding with the date of the survey . Based on agency feedback we understand that most of these units have subsequently been sold/leased. With little additional land available until further roading and infrastructure is put in place, conditions are expected to remain tight for some time. Business demand for Tauriko is expected to remain strong and be underpinned by the nearby Lakes Residential subdivision and the Tauranga Crossing retail development. These attractive fundamentals have also been reflected in the growth in Tauriko land prices and tenanted investments over the past few years. ‘A’ grade properties are now selling on sub 5% yields.
The Mt Maunganui industrial precinct, linked to the Port of Tauranga (POT), continues to perform exceptionally well. POT anticipates moving more than 1.2 million containers through its operations in the current financial year, an all-time high, and is benefiting from strong growth in horticultural and forestry exports, especially to China. These benefits will be further enhanced as tariff reductions under the CPTPP begin to flow for the first time in relation to three significant economies – Japan, Mexico and Canada. As the Bay of Plenty accounts for almost 80% of NZ’s kiwifruit production and is the country’s largest producer of avocado’s, the POT stands to gain from these tariffs gradually disappearing.
Tight vacancies in Papamoa’s industrial precinct reflect growth constraints in the area due to the continuing encroachment of residential development.
Although much of the stock in Judea is older and secondary in nature, the rapid reduction in vacancy, since our last survey, reflects just how tight conditions have become across all of Tauranga and the Mount.
As a result of current conditions industrial rents, both prime and secondary, have recorded further growth over the past 12 months. Similarly industrial yields have continued to firm over the same period. Recent sales include a newly constructed industrial property in Paerangi Place Tauriko with an 8 year lease that sold in February 2019 for a yield of 4.3%. Under such buoyant conditions industrial land values have also posted further significant growth, the most impressive being in the Mount where prime industrial land is selling for up to $1,100m2. Longer term, supply of additional industrial land is likely to come from greenfield areas such as the 250 ha Rangiuru Business Park near Te Puke, although appropriate infrastructure will need to be put in place.
Office…the CBD is changing fast
A renaissance is currently underway in the CBD with multiple projects proceeding and more planned over the next few years. Emerging from all this activity will be a very different looking CBD – more vibrant, more dynamic.
Although many of Tauranga’s larger office occupiers are well housed in modern office space along the Cameron Road ridge, an increasing number of smaller office occupiers are likely to venture back into the CBD as new projects emerge.
Listed below are the major CBD projects:
New office builds over the past few years have added to the overall stock of prime space in the city centre and have resulted in rents generally tracking sideways while much of this space was absorbed. A similar pattern is expected over the next 12 months.
Investment demand remains solid, although opportunities to acquire well let, modern office premises remain limited. Recent sales include a property on Selwyn Street Tauranga which sold on a yield just below 5% in June 2018 and a new 4 level office building on The Strand which sold in February 2019 on a yield just over 5%.
University of Waikato Campus “open for business”
The earlier than expected completion of the University of Waikato campus on Durham Street is generating significant interest in the CBD. More than 950 students have already enrolled at the campus with projections pointing to circa 1,800 students within five years.
The challenge now is for the University and developers to provide an adequate amount of student accommodation close to campus. To date, the University has leased two apartment blocks (Durham Mews on Durham St and Mayfair Court off 15th Ave) which will provide immediate accommodation for 55 students but more is needed.
Quintex Properties Holdings has obtained resource consent to build a 4 level development with 87 rooms at 38 Selwyn St and a 12 level development with 430 rooms at 145-153 Durham Street. However construction of the larger Durham Street development is only likely to occur once student demand reaches peak levels. In the interim, expect demand to continue to grow for well located student accommodation in or near the city centre.
Retail…population growth driving wave of development
Tauranga’s retail scene looks to have ‘come of age’ as a wave of development activity sweeps the region. This is being driven by ongoing population and business growth in both the central city and suburbs which is feeding growth in retail spend. The latest BOP Paymark figures for 4Q2018 also confirm growth in card spending in those sectors which typically benefit from population growth such as food and liquor (up 7% 4Q2018), home improvements (up 5%) and restaurants and cafes (up 7%).
Major Suburban Retail Projects
The retail scene in the CBD is currently undergoing a major make-over with the redevelopment of the Farmers site which will include 8,000m2 of retail space spread over two podium levels including a food and beverage area. Earthquake strengthening activity in the CBD has also increased as the deadline for completion of these works nears. Plans to turn Wharf St into a pedestrian-friendly “eat street” by the end of 2019 also looks to be gathering momentum. Tauranga City Council have agreed to prepare a detailed design for Wharf St which will likely include closing the bottom of Wharf St to traffic and spend $2.9m turning it into a café/restaurant precinct.
However there is no doubt that the current level of CBD construction activity is taking its toll on many retailers. Trade has been severely disrupted. Ultimately though, the CBD will re-emerge revitalised with a greater focus on hospitality and specialty stores to support a larger population of inner city dwellers (both apartment residents and students) and workers.
Mt Maunganui’s retail precinct looks to be transforming itself into more of a boutique retail destination. Vacancies are almost non-existent and further upward pressure on rents is evident. Growth in cruise ship traffic is also helping retail activity. Back in 2017/18 83 cruise ships visited Tauranga, this grew to 113 in 2018/19 and expectations for the 2019/2020 season currently stand at circa 125+ ships.
Suburban shopping centre rents have been rising as the growth in new space sets new benchmark levels especially with the arrival of international brands such as H&M. A similar situation is likely in the CBD where new benchmark rents will be set in a number of new developments. The CBD will also benefit from a general improvement in retail activity with the opening of the university campus in the centre of town.
Strong demand for a limited supply of retail investment stock has seen yields remain firm as evidenced by the sale in November 2018 of a retail complex at Bethlehem for just over $3m on a yield of 5.1%.