Canterbury's industrial property sector finds new balance
Canterbury's industrial property sector finds new balance
30 May 2016
Christchurch, 30 May 2016 - The industrial property sector was the standout performer in Canterbury last year; a trend that is set to continue into the second half of 2016.
Mike Beresford, Director CBRE Christchurch, says that the industrial market has experienced strong growth over the past few years, and 2015 in particular, and it’s not over yet - there are still strong indicators for steady improvement in the future.
“Christchurch has become very attractive as a distribution and manufacturing hub for a number of reasons; housing is within reach, there’s a strong workforce, and operationally it’s a cost-effective location. These factors, coupled with Christchurch’s status as an emerging new city, make it an exceptional industrial location from which to do business.”
Scott Bentley, Associate Director CBRE Christchurch, says that freight and logistics companies across the Canterbury region are now increasingly focused on utilising their industrial premises to maintain a competitive edge in the market and to drive operational efficiencies within their businesses.
Value and volume of industrial transactions on the rise
CBRE’s Christchurch MarketView report highlighted that 2015 saw the number of industrial transactions above $5 million double, and the value of sales increase threefold.
The report also showed that the level of consented floor area in new industrial buildings ramped up in the fourth quarter of 2015, reaching the highest annual level in the past five years. The average floor area of industrial buildings consented was up 71% y-o-y, implying some significant developments are on the horizon.
Mr Bentley says, “There is no doubt that the industrial sector was the star performer of Canterbury’s commercial property sector last year, ahead of the retail and office sectors. We saw an unprecedented level of industrial sales activity in the 2015 year, and that momentum has carried into 2016.”
Getting the competitive edge, and providing for clients: the pressure points
Mr Bentley says there are several pressure points for logistics and warehouse occupiers at present, leading many to adopt a more strategic, long-term approach to their property needs.
“The big focus for many of our industrial clients this year is the need to maintain a competitive edge in the market, as well as the drive to provide an efficient service for their own customers. There’s a strong and continued emphasis on compliance and on ensuring the premises they occupy is safe, so working with landlords to stay on top of those factors is key.”
Mr Beresford says that third-party logistics (3PL) continues to gain traction in the industrial sector, which has a number of implications for occupiers’ property requirements:
“The ever-growing demand for products to be delivered faster and cheaper means that 3PL is a globally growing market. In turn, these are drivers are placing significant pressure on logistics providers.
“One key issue facing 3PL providers is the short-term nature of supply contracts which makes managing clients over numerous sites a challenge and aligning leases important. As Christchurch’s industrial sector continues to gain pace, it’s critical that occupiers and landlords are thinking about solutions such as 3PL and consider how property requirements and leasing agreements can be better-suited to cater for the efficiencies created through new responses to market-demand.”
Tenant demand and operational efficiencies drive new developments
Mr Bentley says that in the short term, several market levers will see a pipeline of new buildings created across Canterbury:
“In the next 3-6 months, we’re expecting to see a lift in the construction of new buildings which is driven largely by demand from occupiers, and of course, the continued shift we’ve seen nationwide, towards greater operational efficiencies.”
Mr Beresford adds that there are few industrial vacancies, with the exception of smaller unit developments under 500sqm net floor area (NFA). He says the market norm is shifting towards larger facilities, which is consistent with national trends.
“We are seeing fewer consents for new builds, but as our MarketView report shows, the consents that are going through are far greater in their size and value which does suggest we’ll see some significant new stock come to market in the near future.
“Newer facilities, built to the latest building code offer better capacity, compliance and return, so many businesses in the freight and logistics sector are seeking out those efficiencies gained through new builds as they work towards their business goals of being more competitive in the sector and delivering on their commitments to customers.”
CBRE reports that industrial development is happening mostly to the western side of Christchurch, focusing on Wigram, Sockburn and Hornby.
Insurance claims underpin tensions between landlords and occupiers in older stock
Mr Bentley says that for occupiers in older premises there are some tensions emerging around how landlords are progressing with, and resolving, insurance claims.
“It is evident that there are some questions and concerns in this area. The first question on the mind of the tenant is; is this building structurally sound? Further to that, once a claim is satisfied and a repair strategy can be actioned, then the question centers on the impact the repair may have on the occupier.
“If the occupier remains in the premises while the works are completed, will that mean disruption to the occupier and their operations? If so, how best can the landlord limit disruption to their tenant, or does that mean that the occupier has to move?”
Mr Bentley says that even when there are no apparent earthquake or insurance related matters to resolve, tenants still need to be careful when they want to complete works in buildings they occupy.
“Again, careful consideration needs to be given to the viability of the works required when those works need to be consented by the local territorial authority. The issue here is when a consent is applied for, it opens the property up to rigorous scrutiny and therefore could trigger other more expensive improvements to be made to the property which are forced on landlords. These additional costs may be unwelcomed by landlords.”
Mr Bentley says there is a minefield of issues to work through for the landlord and occupier, which in some situations can mean that friction leads to tensions boiling over and relationships completely breaking down.
He says landlords and tenants should seek out insight and understanding into the effects and impacts each party faces when important issues arise, as well as getting advice on whether value can be added to properties when tenants or landlords are facing costly improvement works.
“We can provide tenants with advice on options for newer premises whether that be existing properties or new design build options for lease or even to purchase which can provide tenants with greater operational efficiencies.”
Industrial tenants and landlords: be proactive and work together
Mr Bentley says that in order to make the most of the opportunities presented through the highly active Canterbury industrial market, tenants and landlords need to work together for better outcomes, and to front foot issues when they arise.
“Tenants and landlords need to work with each other, not against each other. It’s critical for the two parties to use open communication and understand the impacts of decisions that are being made on the other group.
“For landlords, I would encourage you to be proactive; keep on top of your maintenance issues, and be prepared to make improvements to the property to ensure it remains viable and attractive for tenants. The same is true for tenants; ensure the property you lease is well-maintained, and work proactively with your landlord to ensure you both get the outcomes sought.”
Christchurch replicates a global market
Claus Brewer, National Director CBRE New Zealand, says that Christchurch offers good opportunities for the freight and logistics sector, acting as one of New Zealand’s key distribution hubs:
"Whilst the Christchurch market is not as constrained as the Auckland market at present, both locations replicate a global market from a users’ perspective.
“They are both key South and North Island distribution hubs, with Christchurch offering good opportunity for greenfield development, and the wider industrial market being backed by good labour resource.”
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.