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Surging immigration presents solutions and challenges for commercial property sector

Staff shortages are becoming a thing of the past for many New Zealand commercial operators, thanks to record net migration, though an increasing population is likely to put further pressure on supply, according to Bayleys commercial property experts.

A surge in net migration in New Zealand in 2023 has gone some way to address economic activity issues related to COVID-19 closed borders, but with higher immigration comes the risk of additional pressure on both the supply of buildings and interest rates.

Severe skills shortages across multiple economic sectors, fewer tourism dollars and an inflation-driven surge in interest rates are just some of the challenges commercial entities have grappled with in recent years.

Since borders fully re-opened in mid-2022, a steady flow of people have both arrived and left the country. Figures from Statistics NZ show a net migration gain of 127,400 for the 12 months ending November 2023, amongst the highest gains on record since 2001.

Bayleys head of insights, data and consulting Chris Farhi says the figures show the current migration gain is substantially higher than New Zealand has seen in the past.

“In broad terms, that is positive for the commercial property sector, though there remain concerns about the impact on inflation and interest rates,” he says, citing the November 2023 Reserve Bank Monetary Policy statement which acknowledged the higher-than-expected net migration figure, and its impact on inflation.

“The amount of immigration will increase demand for goods and services, as well as demand for some types of property such as education and training facilities, which are often located in secondary office space.

“But, there is quite a lot of uncertainty around the impact of high levels of immigration on inflation and therefore interest rates,” Farhi says. “It could be a double-edged sword. Even the Reserve Bank has highlighted uncertainty about exactly how immigration will affect inflation.”

Bayleys national director industrial Scott Campbell says open borders have shifted focus in the industrial/logistics sector from staff shortages to warehouse supply shortages.

“There was obviously a slowdown in development over recent years, because of closed borders, but now construction costs have gotten away from us and interest rates are high, constraining future development,” Campbell says.

With industrial vacancies at record lows that will inevitably mean pinch points where demand outstrips supply.

“We know that every person that comes into New Zealand creates demand that ultimately needs to be supported by warehouse footprint, so we do expect supply to be tight in the short to medium term.”

Campbell says supply will stay constrained until there is an alignment of rental returns, construction costs and land pricing. “We’ve seen a little bit of retraction in land but it’s not enough yet to make development worthwhile on the scale needed to address the supply shortage.”

Despite the hold on large industrial development, Campbell says the overall outlook for the sector is positive. “There’s no indication yet that this wave of immigrants are investing in industrial land or businesses, but there is plenty of interest in New Zealand’s industrial sector from offshore investors. Everyone is just waiting for better conditions.”

Bayleys national director retail, Chris Beasleigh says building supply remains one of the sector’s biggest challenges now that immigration has largely resolved staff shortages.

“Construction costs are still high. We might see them ease a bit, but now we have high interest rates which will probably keep development constrained through this year. It’s just still too risky,” Beasleigh says.

The positive aspect of increased immigration for retail, he says, is that it may help mitigate New Zealand’s drop in consumer spending.

“People are paying more on their mortgage so they’re spending less. That extra 120,000-odd people coming into the country might help lessen the impact of that.”

Beasleigh says “uncertainty” sums up the impact of immigration on inflation. “Some commentators say we should expect more increases and it won’t start to come down till 2025. Others are saying they think it’s peaking and rates may drop in mid-2024.

“People just want some certainty before they make a move. At the moment, most of those mid-tier developers are sitting on their hands waiting for a change in conditions.”

Bayleys national director commercial leasing Matt Lamb says the resurgence of international students within immigration statistics is poised to revitalise the education sector, which has been inactive since the beginning of the pandemic, while also contributing to the growth of rental accommodation and other sectors of the economy.

Lamb says, if new long-term residents seek to establish businesses, this it is expected to ignite market activity and support the growth of the secondary market.

Alastair McClymont, immigration law specialist for McClymont & Associates, says he expects current net migration numbers to continue in 2024.

“There are large numbers of Kiwis leaving and very large numbers of semi-skilled work visa holders arriving who have little prospect of becoming residents, and international students who will be four to five years away from becoming residents.”

McClymont believes the current government will need to reverse changes made to overseas investment policies made under Labour to see a notable increase in investor immigration.

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