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Tight fundamentals for large scale industrial occupiers

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The shortage of industrial space for large occupiers is being felt around the country and it’s being reflected in the way deals are being done and how leases are being structured.

Scott Campbell, Bayleys’ national director industrial said because there’s simply not enough space to go around, longer lease terms are being negotiated to provide some certainty and allow business continuity and growth.

“It’s now common to see 10-12-year leases where even just a few years ago, an 8-year lease would have been considered long.

“Review mechanisms have also changed and it’s now pretty standard to see CPI and to-market reviews which, in the current climate, can only mean increases.” Campbell said rents on new-build premises are escalating because the cost of construction remains so high and developers need to make their rate of return stack up.

“Fair to say for existing stock, the market is heavily weighted in the landlords’ favour currently, given the exceedingly low vacancy rates and lack of forward supply. “The tight market is also forcing those occupiers that simply can’t move to proactively leverage the space that they do have to make it more efficient.”

Bayleys Wellington commercial and industrial director Fraser Press said there’s still immense competition for large industrial space in the Wellington region, with all major precincts at capacity, and virtually no land available for any expansion or new development.

“This is impacting the way deals are structured, with occupiers being proactive and working with Bayleys well in advance of their current lease expiry, and prepared to compete for available space.

“We recently brokered a new deal for a property that has a lease in place until mid-next year, and the successful party has committed to a long-term lease, with the rental to be determined by valuation at the time of lease commencement.

“That reflects the heat we are seeing in the Wellington market, and the dire shortage of available space.”

There is limited development with scale coming out of the ground in the region, as there’s just not the land available given Wellington’s geographical constraints. “There are a few pockets in Porirua and Upper Hutt, but realistically, any new development of large-scale industrial space would need to be well north of the city – even as far up as Ōtaki – but that won’t be viable for many occupiers, despite the roading infrastructure being there to facilitate movement.”

In Christchurch, William Wallace, Bayleys general manager South Island commercial and industrial said industrial leasing fundamentals remain tight across the city. “There’s very little existing stock available for lease, especially with any scale.

“If a client wants 4,000sqm, we’d struggle to find them anything in Christchurch – they’d need to be looking at Rolleston and even there, vacancy rates are low. “In terms of future pipeline, there is land for sale but acquisition has slowed down given the current lending rates and construction costs.”

Wallace said rents are still rising – although represent good value when compared to say, Auckland.

“Given the lack of existing and forward supply, those rents are likely to keep going up.”

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