Acceptance of ‘new normal’ emerging as the market faces a challenging year

The Christchurch commercial property market is settling into 2023 with a sense of renewed energy, having shaken off the fatigue of the final quarter of last year.

While the year ahead will be undoubtedly challenging, greater clarity is emerging around the macroeconomic and local market conditions that will shape market participants’ behaviour and expectations.

2023 is the year for collaboration, where a meeting of the minds will see vendors, purchasers and more than likely banks begin to move towards a new normal within the high inflation and interest rate environment. This should see more investment opportunities coming to the market in 2023, with sellers less influenced by the pricing levels achieved in 2021 and becoming more accepting of where investors see value.

CBRE’s 2023 outlook for the Christchurch commercial property market takes into account macro influences including interest rates and inflation; along with several factors that set the region apart from the rest of the country. These include record low vacancy, strong rental growth, a constrained supply pipeline in the CBD office market, relatively low levels of working from home, leading-edge infrastructure and increasing tourist numbers. These factors, combined with the potential for owners to shore up balance sheets by offloading non-core property, are expected to help the local market ride out the challenges ahead.

Interest rates and inflation

Longer term rates are now on a downward trend, with two year swap rates and 10 year bond rates tracking down, albeit very gradually. Market expectations are for the OCR to trend downwards from Q1 2024, earlier than RBNZ forecasts. This outlook should provide some relief to fixed mortgage interest rates and cap rates. Nevertheless, the impact of the Covid years and the unprecedented run of interest rate hikes, combined with the spike in inflation, will see some forced to make tough decisions.

In response, banks are taking a pragmatic, partnership-based approach with property and portfolio owners without hedging strategies in place, as loans come up for renewal. This will not be enough for some and in these cases there is certainly more pain to come. Debt pressure is looming for those commercial property owners who will be in breach of interest cover ratios (typically 1.5% to 2%), with banks shifting their focus away from the traditional LVR metric. Meanwhile there is a clear shift in mindset emerging among property investors, who are focusing on rental growth amid high inflation and softening yields.

On the positive side, the inflationary outlook is likely to have peaked, although high inflation looks more persistent here compared with the US where it has markedly come off historic highs. Cyclone Gabrielle may contribute to ongoing inflationary pressure in 2023, along with potentially prolonging supply chain issues.   

These points will no doubt become election focus areas and the outcome is perhaps less certain than it may have been, which will also impact on business, consumer and investor confidence.

Investment capital

There continues to be significant investment capital looking for opportunities in Christchurch. While many portfolio owners have relatively healthy balance sheets, in a continuation from 2022, CBRE expects most of the activity (and liquidity) in the Christchurch commercial property market in 2023 to be in the $2m to $8m bracket. This is typified by single asset holders and owner occupiers, as well as being an investment range well suited to the current depth in private capital and viewed by mainstream banks as less risky to support. Christchurch has one of the highest proportions of owner occupiers with its dominant industrial market. CBRE anticipates sale and lease back deals will become more appealing this year as businesses look to free up capital.

Retail spending

Despite a subtle softening in retail spending, the outlook is still positive, boosted by the resurgence in tourism and the return of cruise ships. Tourists visiting Christchurch are helping to boost the CBD, with retailers enjoying a busy summer with spending 12.5% up on the previous year. The great East Frame inner city housing momentum, the growing contribution of the Te Pae Convention Centre, and the certainty around Te Kaha stadium will inject even more retail and hospitality demand and vibrancy into the city centre now and into the future.

Population growth and the Canterbury lifestyle drawcard

Healthy population growth projections bode well for the continued vibrancy of our city. Stats NZ population growth projections for 2023 to 2028 place Canterbury as the region with the highest expected population growth in the South Island – higher than Tasman and Otago.

Nationally, Christchurch is remains an ever more sought-after place to live, with a contemporary city centre, access to multiple recreation and lifestyle opportunities and a housing market which still offers good value compared with many other main centres. As our newly rebuilt city centre becomes nationally and internationally renowned, the message is clear that the quality of our built environment is giving Christchurch a competitive advantage and this is going from strength to strength. Canterbury University halls of residence are also reported to be at capacity with waiting lists, following a spike in enrolments in 2023.

Conclusion

While these positive factors are expected to assist in bolstering the local market’s resilience, there is no question that we are facing a tough year ahead, with inflation and interest rate pressure testing the reserves of homeowners, landlords, investors and businesses again following Covid. We need business and consumer confidence to remain positive – however, with the added complexity of an election on the horizon and the impact of Cyclone Gabrielle, that may be easier said than done. Christchurch seems as well placed as any to ride out the uncertainty and there will be increased investment opportunities, particularly in the lower value end of the commercial property market, as owners seek to redeploy capital and rent growth looks likely for the foreseeable future.