The recent change of government and its focus on regional development could prove to be a significant catalyst for growth in Northland. The Labour led coalition has announced plans to set up a $1 billion Regional Development Fund, invest in regional rail and, importantly for Whangarei, conduct a feasibility study looking at moving the Port of Auckland operations with consideration given to Northport. As always the devil is in the detail which is expected to emerge over coming months. However, the initial sense is that the policies could be a net positive for the local commercial and industrial market.
Like many regional centres around New Zealand, Whangarei’s commercial and industrial sector continues to suffer legacy issues. These include an oversized CBD with much of the stock being older and secondary in nature and requiring further seismic strengthening or recycling. Large amounts of leasehold land in prime commercial locations has also stymied development activity to date. The result has been stubbornly high vacancies over the years, feeding into relatively flat rental growth and little movement in values.
Encouragingly prospects for the commercial and industrial sector are improving with massive infrastructure spending in the pipeline, a rapidly growing population base feeding residential construction activity and the wealth effect from recent house price growth underpinning retail spending. The impact of these drivers will see the current relatively high vacancy rates within Whangarei declining over coming years.
A real game-changer for the local commercial property market will be the significant economic benefits flowing from major upgrades to State Highway 1 currently underway and planned. These will reduce travel times between Whangarei and Auckland and onwards to other key freight destinations such as Hamilton and Tauranga.
Multiple benefits are likely to flow from this critical piece of road infrastructure which will open the North to further economic development and population growth. Tourism, in particular, is a sector slated, for significant growth. Already generating in excess of $1 billion in annual spend, Northlands tourism sector could increase exponentially over coming years. Domestic tourism, especially Aucklanders seeing faster travel times to holiday homes and holiday hot spots further North can be expected to show significant growth. Equally, international tourism numbers are likely to show considerable growth when travel times from Auckland are improved. A successful initiative under the Northland Economic Action Plan, the Tai Tokerau Resort College in Paihia, is already helping ensure a steady stream of skilled people are available to support the expected growth in tourism.
Good progress has also been made in other areas of the Economic Plan launched in 2016. These include completion of three byways along the twin Coast Discovery Route, $33 million invested in Northland’s ultra-fast broadband roll-out as well as a number of on-going initiatives targeted to improving businesses involved in the region’s primary sector. Specific Whangarei initiatives include funding in place for the iconic Hundertwasser Art Centre and the successful launching of The Orchard coworking space in the CBD.
In summary, the combination of major road infrastructure upgrades and ongoing implementation of the Economic Plan will ensure long term momentum in Whangarei’s commercial property sector is well underpinned.
Current Vacancies Remain High
Bayleys Research has recently updated the Whangarei commercial and industrial vacancy survey which was last produced in 2013.
The results show that over the intervening 4 years total industrial vacancy has risen from 10.3% to 12.6% – due to rising vacancies amongst poorer quality stock closer to town and the increasing popularity of fringe locations, such as Kioreora Road, with more modern, flexible space.
Retail vacancies have generally remained the same moving marginally from 9.5% to 9.8%.
The greatest improvement has been within office vacancies which have moved from 13.8% to 11%. Growth in space demand by various government departments and, to a lesser extent, banking and legal/accounting professions has been the primary reason for the reduction. Most of the take up has been in better quality office space with high seismic ratings.
To sum up, the survey results clearly point to on-going challenges regarding Whangarei’s persistently high commercial vacancy levels. The city is suffering legacy issues from an over-sized CBD with much of the commercial stock secondary in nature and requiring further seismic strengthening.
Reinvention and repurposing is required and is slowly taking shape. There is no quick fix. Council recently upgraded the Cameron Street laneway adding new paving, street furniture, plantings and a feature canopy across the intersection of Cameron Street Mall and James Street. Importantly the Laneway will also start to improve the link between the CBD and the Town Basin by creating a pedestrian friendly environment along James Street.
Interest in the Town Basin precinct, in particular, is expected to grow with confirmation that construction of the Hundertwasser Art Centre (including Wairau Maori Art Gallery) is proceeding. Construction will occur on land formerly occupied by a Northland Regional Council Building and could act as a major catalyst for further activity in the area.
To date commercial development within the Town Basin has been limited due to the leasehold nature of much of the land which is controlled by local councils. However recent decisions by the Northern Regional Council to dispose of a number of ground lease investments could open the door to further developer interest and a general reinvigoration of the area. Encouragingly ground leases on both the former Anderson Toyota site (corner Carruth and Reyburn Streets) and the Mitsubishi Car Yard site (corner Reyburn and Lower Dent Streets) were also recently sold.
Office Vacancy 11.2%
The Whangarei CBD precinct remains the most significant office precinct with just over a third of the total office space surveyed. It also recorded one of the highest vacancy rates at 13.8% down from 19% previously, along with Railway Ave South which recorded 14.3%, up sharply from 1.3% in the last survey. Vacancies in other precincts with significant office space include Bank St North at 10.6%, previously 15.2% and Walton St East at 9.1% versus 16.2% previously.
The scale of office accommodation outside the core CBD illustrates just how much businesses in Whangarei have decentralised to fringe locations over the years. The only area to add new space since the last vacancy survey was Town Basin, one of the smaller office precincts.
Industrial Vacancy 12.6%
Most of Whangarei’s central industrial space is located in three precincts – Railway Ave South, Walton St East and Town Basin. Vacancies vary considerably between precincts. The Walton St East precinct, in particular, has recorded a sharp increase in vacancies from the previous survey moving from 1.2% to 10.3% due to the departure of a number of businesses moving to areas such as Kioreora Road/Southend of the city. These fringe city areas have more modern industrial space, so quality and earthquake ratings are higher. Railway Ave South vacancies, although still high in absolute terms, fell from 20.4% to 18.2% while Town Basin vacancies rose from 11.9% to 14%.
Going forward we would expect vacancies, particularly in the Town Basin area, to trend down as industrial space is recycled into higher and better uses due to the attractions of the area (ie. borders river/marina, all-day sun, flat land and improving amenities). The major caveat being local council willingness to continue to freehold land they currently hold ground leases on. A title search within the Town Basin precinct reveals that more than 60% of commercial land titles are leasehold in nature.
Retail Vacancy 9.8%
The overall retail vacancy rate of 9.8% is little changed from that recorded in the last survey of 9.5%.
Significant concentrations of retail space are located within four precincts in and around the CBD. The CBD precinct is the largest occupier of retail space, representing around one third of Whangarei’s total stock, and currently has the highest vacancy at 19.8%. This is up from 10.5% in 2013 and reflects the steady migration of retail tenants to Okara Park where vacancies have fallen to a very low 1.2%, previously 10.8%. Other retail precincts comprise Walton St West where vacancy was recorded at 9.6%, previously 7.7% and Railway Ave South at 5.4%, up from 1.2%.
The shift in vacancies reflects the evolving nature of retail in Whangarei. Porowini Avenue is now emerging as a new centre for bulk retail anchored by a recently completed Mitre 10 complex and a number of larger car yards. With Okara Park attracting trade from the CBD, the CBD itself is in the early stages of reinventing itself into more of a food and beverage/entertainment destination.
Commercial Leasing and Investment Activity…A Flight to Quality
Agency feedback points to a real flight to quality, both in terms of accommodation and location by tenants. Second and third tier space is simply not moving in this market. Appropriate seismic ratings are also proving critical to secure leases. Add to this the fact the leasing market remains very price sensitive and we expect rents to continue to track sideways over the next 12 months.
From an investment perspective quality, location and appropriate seismic ratings are also key. There is strong interest from investors in modern, well located and well tenanted properties with attractive running yields. Listings however remain tight for such stock.
A recent commercial and industrial sentiment survey conducted by Bayleys Research in July 2017 also confirmed that most Whangarei respondents, circa 60%, expected little change in both rents and values over the next 12 months.
Major commercial and industrial sales over the last 12 months have included:
• Pacific Property Fund’s (PPF) purchase of the Farmers Building at 8 Roberts Street for $10.6 million in September 2016. PPF have subsequently refurbished the property with Farmers Trading Company signing a new 15 year lease.
• The former Countdown building at 8 Kensington Avenue is currently under contract (subject to diligence) with an Auckland developer. Seller is the Northern Regional Council.
• Anderson Toyota 5,005m2 site (corner Carruth and Reyburn Street) sold recently (including sale of ground lease) to an undisclosed buyer. The site was previously earmarked for potential apartment/retail development.