Industrial precincts across the country have seen vacancy rates falling, rental rates rising and development activity surging as tenant and occupier demand for industrial workspace has boomed.

Within the sector small industrial units have become so popular that finding available stock for sale or lease is proving difficult.

Demand for industrial units of between 50m2-500m2 has escalated over recent years driving overall industrial vacancy rates to multi-year lows across the country, underpinned by tightening market conditions in Auckland and Wellington.

Colliers International latest research shows overall industrial vacancy across the Auckland region is just 1.8 per cent. That figure has sat below 2.5 per cent since August 2015. In Wellington, similar trends have been in play with overall vacancies sitting at 2 per cent in November last year and below 2.5 per cent since late 2017.

It is not only Auckland and Wellington experiencing these tight market conditions. Similar conditions are reported in most of the cities and provinces in the North Island and South Island locations Colliers monitors.

Demand is so high, the Savills New Zealand Auckland small unit industrial team of Christian Mair, Edward Dean and Tom Cooper has this year faced huge pressure from tenants for units but nowhere to put most of them. “Competition for properties has been intense and they are just not available,” says Dean.

“If they come to the market they are usually snapped up by owner-occupiers, who would rather buy than lease if they have the wherewithal to purchase or can get bank funding, which is proving more difficult these days.”

Much of the tenant demand is from small businesses moving from residential homes or shifting from short-term storage premises to bigger units as they expand. Savills recently leased a 200m2 unit to an electrical company moving from a short-term leased 80m2 storage unit. “It’s a lot bigger for the company but still a small unit,” says Mair.

Apart from demand from tradies and small businesses, inquiries for units have also increased as a large number of big businesses have been forced to hold larger inventories. The disruption to supply chains arising from the pandemic has forced companies to move from a just in time distribution model to a just in case system and they need storage space.

ABOVE AND RIGHT A tilt slab unit built in the 2000s will sell for $6000m2 in East Tamaki.

DIVERSIFICATION ON OFFER

Small industrial units have been a good alternative for residential property investors wanting to diversify, says Cooper. They tick over and they’re never a problem to lease. It’s often less about a square metre rate than affordability for a painter, car mechanic or other business.

“On a good day residential property yields are 3-4 per cent. If an industrial unit can be bought at a reasonable price, the tenants removed and it is tidied up and rented at a higher amount to maximise the value, it might sell for a 5-6 per cent yield,” he says. “While the return is higher, an investor has to put up more capital initially, whereas a first home buyer might be able to put a 10 per cent deposit down. However, whatever way it is looked at there is a better yield from an industrial unit.”

The obvious attraction of industrial units is they can be bought for under $1 million – some 50m2 units even from the late $300,000s to mid $400,000s in the capital, says Fraser Press, Bayleys Wellington commercial and industrial director, in the company’s latest Total Property.

A tilt slab unit built in the 2000s will sell for $6000m2 in East Tamaki and for a small 200-300m2 unit buyers can expect to pay $5000m2 but it depends on whether it’s being sold as an investment or whether it has vacant possession and a business can move straight in, says Dean. “Vacant units tend to sell for more to owner- occupiers rather than an investor.”

Prices for units are dropping and will keep dropping after coming off last year’s highs, says Mair.

“Owner-occupiers can make a purchase stack up financially compared to an investor who might be borrowing bank money at 6.5 per cent and not getting a higher return than 5-6 per cent. That is across the whole industrial market,” he says.

There are few investors buying. They just can’t make the figures work, says Cooper. “Last year small industrial units were selling for low 3.5-4 per cent yields and owners still want those prices, but the market has changed completely and those owners have not necessarily adjusted their prices.”

Cooper says the market hasn’t landed on where value is at the moment. “As all prices were sky high last year they are still coming back to fair value compared to where they were.”

PRICES BLOW OUT

Not only have prices for existing and new units risen, but South Auckland land prices are making it prohibitive for developers to build. Dean says the cost of industrial zoned land is now well over $1000m2. A recent offer was made by Savills for an owner-occupier client on 3.5ha at $1850m2 so he can develop industrial units. Land sold last year at $1150m2 is now worth $1300m2.

Drury South, 40 kilometres from Auckland’s CBD, is the only area where land prices have dropped. A large amount of land sold to developers and businesses, who no longer need it or want to develop it because of financial constraints, has come back on to the market and is selling for $650-$700m2. Last year it was priced at $800-$850m2. “Even though it is cheaper, it is no guarantee it will sell in a hurry,” says Mair.

Small unit developments in blocks, often unit titled, are spread out across Onehunga, Penrose, Mt Wellington and East Tamaki in South Auckland, Silverdale, Wairau Valley and Albany on the North Shore and some in West Auckland. Wellington has new developments at Porirua, Petone and near Tawa while in Christchurch small units are found at Sydenham, Wigram and Rolleston.

‘Competition for properties has been intense and they are just not available’ EDWARD DEAN

An obvious attraction for investors, apart from price, is the more modest lease terms for units. They are more commonly about three years with rights of renewal and more flexibility as a landlord because there is not the same level of bureaucracy to deal with as a
residential landlord has.

On the plus side, says Dean, rents are steadily rising. A flat rent across a high stud 200m2 unit on average is $200- $210m2. Small businesses might find that expensive, but they are still leasing. “It is more of a landlord market due to the lack of stock,” he says.

The Savills team expects the small industrial unit market to worsen next year if interest rates keep rising. “Small businesses often struggle to buy a desired unit as they can’t borrow as much since the Credit Contracts and Consumer Finance Act tightened rules for lending. The investment market is also dead.

“On the other side of the coin, a savvy investor who has held a tenanted unit for, say, seven years is probably earning a 15 per cent yield,” says Cooper. “What will add to pressure next year for investors and owner-occupiers will be if they need to refinance at much higher interest rates and their property becomes too
expensive to hold.”