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Greater certainty drives market optimism to close 2023

Optimism is returning to commercial property sectors as tourism, immigration and acceptance of “higher for longer” interest rates bring greater certainty for investors and landlords, say Bayleys sector experts.

Bayleys national director – commercial and capital markets, Ryan Johnson says the repricing of assets and the settling of other market drivers like construction costs mean the commercial market is heading into 2024 with a better understanding of what lies ahead.

A key factor in the increased optimism has come with market leaders accepting the current higher interest rate environment, whilst keeping a close eye on the ever-softening wholesale rates.

“The market doesn’t like uncertainty. Now there is a lot more clarity around peak interest rates for the next three to six months. While that’s not great, it is certainty which means people can start to deal with what’s in front of them right now,” Johnson says.

“It has taken from February last year until Q3 this year for the market to adjust to risk and re-rate. We’ve seen plenty of repricing across each of the asset classes, whether it's office, hotel, retail or industrial,

“Significantly the bid-ask spread that was really dislocated at the start of the year has narrowed up, and deals are happening, particularly over the last few weeks as we look to close out the sale of over 170 properties across the country in December,” he says.

While transaction volumes have remained at historic lows through 2023, Johnson expects building owners to now be able to adjust to the new reality and plan ahead.

Stabilised construction costs in tandem with softening cap rates should also make new development more appealing over the next 12 months, he says.

The easing of construction costs may create opportunity in the industrial sector with the possibility of developers taking advantage and pushing ahead with new speculative stock, says Bayleys national director – industrial, Scott Campbell. “There’s an opportunity there with relatively high net migration expected to create the need for more industrial space in the foreseeable future.”

Campbell says the sector also saw strong leasing activity in 2023, with vacancy rates remaining tight throughout the year as well as a rise in leasing rates, albeit not at the same pace as the previous 12 months. “We are starting to see some easing of those vacancy rates as consumer spending declines, though the drop-off in construction activity over the past 18 months should mitigate that easing of vacancies,” he says.

Bayleys national director – retail, Chris Beasleigh says that decline in consumer spending has been a key market feature for the retail sector through 2023, though it was mitigated by the return of tourism and immigration.

“2023 represented a complete turnaround from 2022 in terms of consumer spending. Having been through that exuberant post-pandemic spending period, consumers have really reined in their spending this year,” he says.

“Crucially, while consumers have scaled down their spending, they haven’t stopped, so while we have seen a few post-pandemic hangover bankruptcies and liquidations, it hasn’t been a lot. The areas probably hit hardest are those selling large purchase items, and food and beverage.

“Large-format retail is still ticking along as the sector’s strongest performer, with a very low vacancy rate.”

With new projects on pause as developers waited for some certainty in market conditions, the rise in immigration and tourism will see increased competition for existing retail stock, Beasleigh says.

Bayleys national director – hotels, tourism & leisure, Wayne Keene, says within the tourism sector itself the big focus for 2023 has been on sustainability.

“There has been a real shift in focus towards sustainability within the tourism sector globally and in New Zealand.

“Most accommodation businesses and property owners are taking the view that sustainability measures are something that must be addressed, or risk being left behind. With New Zealand flying the “clean green” international flag for several years now, it has become a driver of tourism to this country.”

Other challenges that will have ramifications for the sector in 2024 are the re are the continued use of motels by the Ministry of Social Development as long-term tenancies and a lack of new development, Keene says.

“With growth expected in the accommodation line and a drop in new development, existing stock will be highly sought after.”

Bayleys national director – business sales Jayson Hayde says a notable feature of business sales in 2023 has been the number of people looking to exit their business to retirement. “Many of those people have been considering that decision for some years but delayed it due to the pandemic. That means robust businesses are coming to the market that have survived the pandemic.”

The market opportunity for 2024 lies in structured acquisitions that allow for business growth, Hayde says. “There are great opportunities for organisations to acquire other businesses that bring in solid adjacencies to their current core business.

“Equally, the opportunity for sellers to capture the capability of buyers, exiting the corporate world as some look for more control of their future, is providing a unique structured transition environment. It can often be better to buy an existing business with the skills and products that will drive your growth and diversification, rather than start a new one with more attributed risk.”

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