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'Mixed outlook' for commercial property sector

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Fuseworks Media
Fuseworks Media

Westpac Economics says the commercial property sector is enjoying a purple patch driven by high occupier and investor demand, but that the outlook varies across major centres and will weaken in the last part of the decade.

"Vacancy rates in Auckland in particular are very low," said Westpac Industry Economist, David Norman, "But in Wellington, there hasn’t been as much job growth, and at the same time the public sector is actively reducing its footprint. In Christchurch, supply is catching up with demand after years of rebuilding."

A number of large commercial developments are underway in Auckland in response to huge growth in the workforce over the last four years. On a smaller scale, Tauranga and Hamilton are expanding industrial, retail and office space as strong population growth demands it.

A reasonably strong economy is expected to underpin the solid outlook for the upper North Island through to the end of 2017. But by the middle of 2018, the Canterbury rebuild is expected to wind down more sharply, and net inward migration is likely to slow, pulling down national economic growth.

By that point, a substantial amount of office space will have come on-stream in Auckland, which will probably mean higher overall vacancy rates, centred on lower grade properties, and less impressive capital gains.

In Wellington, the government will be well into its footprint consolidation programme. The public sector is estimated to account for around half of all office space in Wellington. If it achieves its goal of reducing its footprint by around one-third, this will leave 16% of Wellington office space needing new tenants.

In Canterbury, there will be a fine balance between the expiry of long-term leases for city-fringe offices signed after the quakes, local developers bringing their insurance-funded newbuilds to market, and re-entry of third party developers if building and land costs make development viable.

"Overall, we expect the commercial property market nationwide to be a bit weaker from the middle of 2018, with higher vacancy rates, limited rent growth and therefore weaker capital gains," said Mr Norman.

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