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Tight industrial market may ease

Occupiers can tentatively expect tight supply conditions and escalating rents to moderate this year.

Across all sectors of the commercial leasing market, the top three concerns for occupiers remain securing property of the right quality, the right scale and in the right location.

Scott Campbell, Bayleys’ national director industrial says these credentials are paramount for businesses looking to lease industrial property and getting all three components in one property has not been an easy task for several years now.

“The escalation of e-commerce and its associated fulfilment and delivery functions saw demand for warehousing, logistics and distribution explode during the pandemic and only now are we seeing some tapping off of those unprecedented market-dictated space requirements.

“Consumer spending is also down due to inflation and spiralling mortgage rates, and now that supply chain dynamics have largely resolved, there’s not the pressure to have ‘just-in-case’ warehousing for forward inventory storage – although unfolding tensions in the Red Sea could change things again.

“While the availability of industrial property to lease is still fairly tight in strategic and popular locations nationwide, some of that frenzied rental activity could ease.”

Campbell stresses that if net migration numbers continue to rise, then the market will change again because each additional person making New Zealand their home generates a per capita requirement for industrial space.

“Solid net migration growth will provide a level of confidence to the development sector and lenders, and encourage new investment in industrial space.”

Bayleys’ head of insights, data and consulting Chris Farhi says there are some early signs that the industrial market could be softening after a protracted period of extremely tight fundamentals.

“Over the past few years occupiers have seen rents rising rapidly and often found it difficult to find space to lease given the lack of available stock.

“In some cases this meant businesses had to either put their plans into a holding pattern or change tack to allow them to implement the plan for their business.

“It will be good news for tenants if some of the pressure is taken out of the market.”

A survey of Bayleys agents in Q4 2023 showed mixed views on the directions for rents this year depending on where they were based across New Zealand.

The respondents noted that tenants are actively trying to best fit their property requirements whether that’s better, bigger or smaller to suit their needs.

The key hurdles industrial leasing agents are facing with tenants is the lack of suitable stock, a reluctance to accept higher market rent levels (particularly in the context of weaker business sentiment), and lending challenges as banks seek guarantees to meet funding requirements.

Meanwhile landlords are not that keen to offer lease incentives and still have high rent expectations.

Industrial rents will find their new market level as 2024 progresses and agents on the ground in Auckland, Hamilton, Tauranga, Wellington, Christchurch are all fielding good enquiry from occupiers.

Campbell says overall, he expects the industrial leasing market to remain relatively tight this year, while rental increases are likely to be more subdued and normalised.

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