It’s been impossible to ignore the stellar rise of commercial property in recent years. As the residential property sector was hit by skyrocketing prices, falling yields, much increased deposit requirements, and a slew of regulatory changes, commercial property presented a very attractive alternative for investors.

It was once seen as a difficult asset sector to invest in due to the traditionally higher prices and deposit requirements, but that is no longer the case. And that’s led growing numbers of people to turn to commercial investment.

And, despite less certain economic conditions, investor confidence in the sector going forward remains high. Colliers September 2019 quarter Commercial Property Investor Confidence Survey shows that a net positive 24% of respondents expect investment conditions to get better over the next 12 months. This is similar to the five-year average of a net positive 25%.

In 12 out of the 13 regions surveyed, with Christchurch being the exception, there was a net positive score. Heading into 2020, it seems clear that interest in, and demand for, commercial property remains strong. So we thought it timelymto take a look at some of the trends currently at play across the sectors. Here are our top picks.

1 Industrial Is The Star

Not so long ago, industrial property was the poor cousin of the commercial sectors. But, my, how times have changed. These days property experts point to industrial as he star performer for investors.

There’s a number of reasons for that, with a major one being the global shifts in the nature of retail - the rise (and rise) of online shopping around the world. That change has driven growth in demand for industrial property as more warehouses and storage are needed to house, and dispatch, retail goods. In turn, that has impacted positively on returns.

In New Zealand this development has been heightened by a shortage of welllocated industrial space. The fact that demand exceeds supply has made for a positive market dynamic.

This is particularly the case for Auckland. Colliers’ latest report on the region’s industrial sector shows the overall vacancy rate remains as low as 2.1%. It states that warehouse rental growth continues to track upwards due to strong market fundamentals and high levels of tenant demand.

Goodman (NZ) chairman Keith Smith says focusing investment in the supply constrained Auckland industrial market is a successful strategy.

“It is delivering high-quality property solutions for customers and strong returns for investors. Sustained demand for warehouse and logistics space, driven by economic and demographic growth, make it New Zealand’s best performing commercial real estate sector.”

2 Retail Gets Creative

The struggles of the retail sector to adapt to today’s digital-driven world have been well-documented. Thanks to the increasing influence of e-commerce and changing shopping preferences, many traditional types of retail property have seen hard times.

However, it’s not all over for retail. According to Bayleys’ latest report into the Auckland retail market, there is a growing consensus that having a bricks and mortar presence drives increased online activity. This underpins demand for physical space, particularly within high profile locations.

In Auckland and Wellington, there are some strong market fundamentals, including solid and confident regional economies and high visitor numbers, which are acting as positive stimuli for their retail sectors, the report says.

Basically, there’s still tenant demand for retail properties, but the sector has softened and the performance of rents and yields is mixed. Looking to examples of successful retail properties, both in New Zealand and overseas, suggests that the best thing retail property owners can do to increase the attractiveness of their premises is to get creative.

That’s because the changed consumer landscape means people expect not only to be able to do their shopping, but to also have heightened convenience or an experience while doing so. In practical terms, that means transforming properties into mixed use, or mixed purpose spaces and offering opportunities to incorporate “experiences” into the retail mix. So think leisure and service centres – with bars, restaurants, hairdressers, dentists, doctors, and so on instead of pure retail spaces.

There are some inventive overseas examples. One department store has replaced selling space with “experience playgrounds” where shoppers can learn new skills like pasta-making or to be a barista. Another is an HMV store which merges retail and logistics. It includes a distribution centre, a music venue for live performances, a screening room for new films, and a café.

3 High Quality Office Space

Business confidence might be shaky but that has not translated into tenant demand for office space. According to JLL’s latest Vertical Vacancy Report, there’s no evidence in the prime office accommodation market that uncertainty is affecting businesses’ decisions regarding property.

Rather vacancy rates remain minimal in both Auckland and Wellington, while Christchurch continues to see a return to normalisation in its CBD office market and a clear reduction in available space, it says. Both Colliers’ and Bayleys’ latest reports into the Auckland office market backs this up.

But there is one significant trend running alongside this: tenants want high quality workspace. In Auckland, occupier demand for higher-quality premises has led to over 25,000m2 of office stock being removed from Colliers’ survey for refurbishment works.

‘Our ongoing research in this sector shows that
sustainability features result in less vacancy and leasing downtime between tenant moves’ CHRIS DIBBLE

Demand for high-quality office space is far from a new thing. But the proliferation of hip, well-fitted out flexible working spaces, along with changes in the way people work, have had a big impact on the market. Tenants want a mix of different, better elements in the office space they lease these days. And office property owners are advised to help deliver such spaces.

This drive for high quality, new look office property itself incorporates a number of different trends. Already noted, and covered in depth in our December issue, is the growth in flexible workspace.

That usually involves provision of a combination of open plan working stations, break out offices and meeting rooms plus service areas like kitchens and function rooms. Another big trend continues to be the greening of office space. Colliers’ latest research on occupancy levels in Green Star rated buildings shows that tenants have a strong preference for the benefits that green-rated buildings provide.

It’s not just about a feel-good vibe. When done right going “green” also delivers reduced operational costs, maximising the use of natural resources (like light, sunshine and rain) while minimising electricity and other resource usage.

And it pays off for landlords. Chris Dibble, who is Colliers’ director of research and communication, says green-rated buildings outperform the overall office sector in terms of overall vacancy rates.

“Our ongoing research in this sector shows that sustainability features result in less vacancy and leasing downtime between tenant moves. Not only do tenants benefit, but so do landlords.

Higher occupancy means higher total returns, especially over the long-term.” There are a number of other new-age trends which are increasingly in demand when it comes to high-quality office space.

One of these is biophilic design which is about boosting connectivity to the natural environment through the use of direct nature, indirect nature, and space and place conditions. Others are the use of advanced smart technology (which includes intelligent automation and smart control) and the integration of residential aesthetics into the commercial environment in terms of space and furniture.