Christchurch bucks global sentiment trends as demand surges ahead

Low vacancy and high demand in the Christchurch commercial property market are contributing to a more secure outlook for the rest of 2024, according to the latest Christchurch Figures report from CBRE Research.

Positive demand from occupiers has resulted in vacancy falling across all sectors, making Christchurch a stand-out performer nationally, despite continuing economic challenges. 

This high demand and low vacancy is placing upward pressure on rents, giving investors confidence in the commercial property sector.

Tim Rookes, Managing Director of CBRE’s Christchurch office, said there remains a significant amount of capital ready to invest in commercial property. However, the ongoing disparity between buyers’ and sellers’ price expectations remains a challenge and transaction volumes remain low as a result.

“Investors are sitting on a lot of capital and searching for investment opportunities, which is now the case across all commercial property sectors in Christchurch. Investor appetite has spread beyond the industrial market, which has been top of the wish list for some years now, with buyers now actively seeking CBD office and retail property as well.

“However, the meeting of minds between buyers and sellers that is required before transaction volumes can pick up is only just showing signs of aligning, with a tightening of last year's bid-offer pricing gap.”

Jorge Chang Urrea, CBRE Research Manager, said the outlook for commercial property owners is improving, with the current yield cycle likely to be near its peak.

“Upward pressure on sales yields appears to be fading. This offers a glimpse of pricing potentially bottoming out and providing a more secure outlook to the investment market outlook, despite the current illiquidity.”

CBRE’s Christchurch figures report shows vacancy rates and rental growth across commercial property sectors buoying the market, with these drivers expected to remain in place this year.

Industrial Market

In the industrial market, virtually no vacancy (just 0.1% in prime grade buildings and 0.6% overall) is resulting in strong rental growth, with prime rents reaching a new record of $136 per square metre at the end of March 2024 – 5.6% higher than a year earlier. Development rents are around $140 to $150 per square metre.

While there was a robust level of new supply of industrial buildings entering the market in 2023, which is ongoing in 2024, continued strong occupier demand and absorption especially at the top end of the market could uplift rents even higher in the short term. High construction costs are also fuelling rent growth.

CBD Office Market

Christchurch’s CBD office market is another stand-out performer. In the face of strong tenant demand, especially for sought-after smaller floor plate space in the CBD, prime grade net effective rents are up to $378 a square metre at March 2024 (2.8% higher than a year earlier).  Development net rents for prime office spaces are now upwards of $450 per square metre.

There was a significant decrease in CBD office vacancy in the second half of 2023, with overall vacancy falling from 5.7% in June to 3.1% in December. Prime grade vacancy in the core CBD sub-precinct is now just 0.4%. 

A new wave of office property supply is entering the CBD market in 2024, following the post-earthquake rebuild phase that concluded in 2019. Around 33,500sqm of new stock is expected this year – including 12,000sqm of new construction and 21,500sqm in strengthened and refurbished buildings. 

Among the new buildings under construction are Carter Group’s The Regent (Cathedral Square) and 209-211 High Street projects.

The largest refurbishment projects are the 14,000sqm ex-IRD building at 224 Cashel St and the 4,200sqm former State Insurance building at 116 Worcester St.

Despite the very strong demand from occupiers for office space, the CBD development landscape remains a ‘build to order’ market, said Rookes.

“There is lots of energy in the CBD market and some exciting new build projects underway. However we are still seeing developers requiring close to 100% tenant pre-commitment before commencing new construction, with little or no speculative building activity happening. This is due to ongoing high construction costs as well as general global economic negativity impacting confidence.”

Retail Market

Despite pressure on household disposable income, retail spending in Christchurch is robust, supported by international tourism. Central city retail spending grew by 8.3% during 2023, higher than both Auckland and Wellington.

CBD prime retail face rents in March 2024 approached $1,200 per square metre at the top end of the market. Incentives have reduced from 4.2% to 2.8% since the end of last year, with very high tenant demand for street-front retail space, especially on Cashel Street.

“We are seeing strong enquiry from New Zealand-based retailers particularly over the last two months, while a backlog of both national and Australian retailers are queuing up for prime core street front positions on Cashel and High Streets. The reality is we really have no options to match this demand, which is frustrating, but healthy for our retail dress circle,” Rookes said.

Further positive drivers for investment into Christchurch include healthy migration inflows and a resilient housing market, which will help take the property market through 2024 in good shape.

“Christchurch property is displaying excellent value compared with most other major centres in New Zealand, while the South Island as a whole is set to benefit from the ongoing tourism recovery as well as population growth. With global institutional investors still inactive, our strong domestic investment-focused market is somewhat cushioned from continuing negative economic sentiment offshore,” said Rookes.