New Zealand Real Estate Market Outlook 2023

Solid Prime market fundamentals will underpin Auckland returns in 2024

The Auckland property market entered 2023 on a highly favourable occupancy footing across some sectors. Industrial markets have tightened during the second half of last year from already low vacancy levels, with Auckland’s at a scarcely believable 0.1% across the entire market. The main area of vacancy concern is in Secondary offices where vacancy reached 19.3% mid last year.

Reflecting the expected profile of economic activity, the current strong occupier momentum in the industrial, retail and office sectors for good quality and well-located space will continue into 2023 but is expected to lose some steam into the second half of the year. In terms of vacancy outcomes, supply will likely have the biggest influence.

Sales volumes are forecast to increase through 2023 with more motivated sellers coming to the market driven by the need for greater liquidity considering debt financing pressures as higher interest rates flow onto lower interest cover ratios, and LVRs and gearing covenants get impacted by revised valuations.

With little relief from interest rate pressures in H1 2023, the emergence of more motivated vendors will likely shift this middle ground towards buyers’ pricing.

As the yield driven capital return component continues to be negative in 2023, total returns are forecast to moderate, with this year also seeing an additional handbrake from our forecast of somewhat lower rent growth. Average commercial market total returns over the 2023-2026 period are forecast at 6.7% pa, but with significant sectoral variations.

Commercial property activity expected to pick up from late 2023

The significantly reduced transaction volumes in the Wellington commercial property market in 2022 are expected to continue throughout most of 2023, predominantly owing to the impact of interest rate increases.

This is likely to cause ongoing market inactivity until more clarity emerges on the timeline around normalisation of borrowing costs.  Once the market has confidence that interest rate declines are imminent, we will likely see the bid-ask gap narrowing to a point where buyers and sellers of commercial property can find a logical middle ground.

While the market is still in a ‘wait and see’ mode, CBRE is expecting activity to pick up later this year once interest rates have hit their peak and the pathway towards rates decreasing is clearer. Property valuations are expected to continue to move in line with changing market dynamics. With high interest rates persisting, the challenge facing the market this year is acceptance of the need for valuations to continue to move more toward buy-side expectations and it is expected that transaction evidence will begin to support this. 

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.