Investors can’t get enough of it and neither can tenants unfortunately: industrial property is one of the Shore’s most sought after – yet hard to obtain – commodities.
It’s become an all too familiar tale on the North Shore – frustrated tenants being unable to secure bigger and better industrial premises in which to grow their businesses.
Not only are they competing with other tenants but they’re also up against businesses looking to protect themselves from increasing rental levels and making the most of low interest rates to borrow and buy rather than lease.
Also in the chase are investors, constrained by a shortage of investment properties with long leases being offered for sale, and who are consequently focusing on vacant or semi vacant buildings as well.
Bayleys North Shore Commercial’s industrial team leaders Matt Mimmack and Laurie Burt say this is not a new phenomenon but is one that has been gathering momentum over the past few years as a result of very low vacancy rates.
“It’s now reached the point where some industrial property owners aren’t bothering to relet when a tenant moves out and instead are putting properties up for sale because they can get more for them vacant than occupied,” says Laurie Burt.
“All of these factors make it a very challenging market for tenants – to the point where in some instances they have been offering more than asking rentals, particularly for smaller properties, just to get their hands on premises.
“In the worst case scenario, and sadly for the Shore, they are having to leave town to find what they are looking for, generally moving either further north or out west where there is a more plentiful supply of industrial land and new premises.”
The numbers speak for themselves with the supply of industrial premises on the North Shore remaining as tight as a drum. The latest Auckland industrial accommodation survey conducted by Bayleys Research shows the Albany Basin vacancy rate sitting at just 2.1%, below the overall total vacancy rate of 2.8% for the region’s largest industrial precincts.
Bayleys Research manager Ian Little says industrial vacancy rates have changed little across Auckland over the past three years with high levels of business growth and expansion continuing to keep them at historically low levels despite increased development activity.
Among the three Albany precincts measured in the Bayleys Research survey, Mairangi Bay had the lowest vacancy rate at 1.3% albeit this was up from 0.6% in 2017. North Harbour and Rosedale showed little change, registering 2.0% and 2.5% respectively.
The North Shore’s other established industrial precinct, Wairau Valley, is experiencing similar trends. Vacancy remains at negligible levels with strong tenant and owner occupier demand, particularly for smaller properties in the 300m²-600m² size range.
Compounding the problem on the Shore is the fact that there is little land left which is available for new industrial development. Matt Mimmack says new premises that are being developed on small pockets of suitably zoned land are quickly being snapped up by investors and owner occupiers.
A case in point has been Kea Property Group’s development of a range of smaller industrial units off Corinthian Drive in the Orchard Business Park. These all sold out well ahead of completion, several of them through Bayleys North Shore Commercial.
“Kea is a longstanding, experienced developer so investors know they will be producing a good quality, very leasable product and are therefore prepared to buy these units vacant off the plans,” says Matt Mimmack. “It means, however, that tenants don’t get a look in at these new, modern premises unless they have a well-established contact with a real estate agent who can link them up with a purchaser.”
As a consequence of development being hindered by a shortage of and the increased cost of land, there has been a migration of construction activity – and North Shore businesses – to new industrial precincts further west such as Hobsonville, Westgate and north in Silverdale.
“There is a good range of new premises being developed in these precincts which we can assist tenants, owner occupiers and investors to access,” says Matt Mimmack. “But again there is plenty of competition for these offerings so interested parties need to get in early in the planning and development phase of these projects.”
While the tight supply of industrial premises on the North Shore has been tough on tenants it’s had a positive spin-off for landlords.
With intense demand outstripping supply, rentals are unsurprisingly experiencing upward pressure. “New premises are setting new benchmark levels and, as a consequence, dragging general rental levels higher as well,” says Laurie Burt.
“This upward movement in rentals combined with the firming of yields that has been evident in recent years has resulted in in industrial values rising, in some cases quite considerably.”
Bayleys Research has been tracking the median income yield achieved on sales of Auckland located industrial property for many years. Yields soften (go higher) in weak markets when tenancy risk is higher and firm (reduce) in buoyant markets like we have at present.
After being as high as 9% in the weak post GFC market
of 2009/10, the Bayleys Research median yield index dipped below 6% for the first time in the final quarter of 2016 and now sits at 5.4%.
“The current low level of industrial yields reflects the ongoing demand for property assets in the low interest rate environment that has prevailed since the Global Financial Crisis,” says Bayleys Research manager Ian Little.
Matt Mimmack says good quality North Shore industrial investment properties have generally been selling at yields of 4.5-6%. He says while larger, higher value offerings have traditionally sold at higher yields than smaller properties, this is not always the case in the current market in which a very limited supply of bigger offerings are being presented for sale.
A recent example was his sale in conjunction with Laurie Burt of 9 Tawa Drive, Albany which sold at auction for $5,380,000 at a 4.55% yield. The 1,458m² industrial building on a 2,457m² corner site was constructed in 1994 for multinational tenant Xylem Water Solutions, which has been in occupation ever since. It renewed for four years in April with one further four-year right of renewal remaining on its current lease.
“This is the first time the property has been on the market since it was built and it would be one of the best North Shore investment offerings we have taken to the market in recent times because of the strength of both the location and tenant,” says Matt Mimmack. “This was reflected in the strong interest in the property with over 100 enquiries and 12 bidders at the auction.”
A similarly sized property, a 1,301m² warehouse, showroom and office building on a 1,729m² site at 60 Apollo Drive, Albany was sold earlier this year for $5,100,000 at a 4.47% yield by Matt Mimmack. This also had a longstanding tenant, Wallace Cotton, which exercised a final four-year right of renewal in October 2017.
In another low yielding sale, a 692m² building comprising five industrial units on a 1,017m² site at 17 Ashfield Road, Wairau Valley sold post auction for $1,700,000 at a 4.45% yield through Trevor Duffin and Ranjan Unka, Bayleys North Shore Commercial. It is fully leased to four tenants.
Looking ahead, it is likely that yields have reached their cyclical low, says Ian Little, which means most future capital growth will come from rental increases.
“A sharp increase in yields remains unlikely as increases in interest rates are almost certain to be limited and spread over an extended time frame. A majority of economic commentators are forecasting that the Official Cash Rate will remain around its current level until late 2019 before slowly increasing. If this is the case then investment property yields will hold at close to current levels over the short to medium term before gradually starting to edge up again.”
