Industrial leads recovery in Dunedin commercial property market

Renewed investor interest in Dunedin industrial property as interest rates fall should help position the market for growth, according to global property consultant CBRE.

The latest Otago Figures report from CBRE Research shows that the local industrial market is in a strong position compared with other commercial property sectors, driven by limited availability of land and substantial public and private investment into key development projects.

While sales and leasing activity has slowed in recent months, the resilience of the industrial sector through the downturn should place the market on a solid footing for renewed growth as buyer confidence returns, said Darren Bezett, CBRE commercial valuation Director.

“Industrial property has been very strong in recent years with limited supply of industrial premises. While there has been a slowdown in activity recently with some businesses deferring expansion plans, there is still good demand from both tenants and investors especially for good quality, modern premises with long leases in place.”

This existing occupier demand and low vacancy rates, combined with the ongoing shortage of industrial premises, has pushed rents up in recent years and is holding property values steady. However, rents have now plateaued as the market has moved closer to supply and demand equilibrium, with many businesses putting property decisions on hold.

The high demand from both owner-occupiers and investors for industrial property has kept the older/secondary grade end of the market healthy, reflecting the low availability of newer stock. 

Industrial property in outlying locations including Kaikorai Valley Road and North Taieri also remains popular, due to the lack of availability of industrial space in central Dunedin and the unpopularity of leasehold land.

The CBD office and retail sectors are more of a mixed bag, but there are positives in both these sectors as investors and occupiers look to position themselves to benefit from the expected improvement in economic conditions, said Bezett.

“Dynamics in the CBD office market are changing, with the introduction of significant new supply of space. This is creating backfill vacancy as tenants move to new developments, notably ACC moving into its new building. This will leave behind a significant amount of large floor plate space which will be difficult to re-lease.”

High demand and limited new construction has pushed office rents up in recent years. However, the excess supply entering the market, combined with economic pressure prompting occupiers to downsize their office space, will exert downward pressure on rents this year. 

In retail property, rental rates and vacancy have remained consistent on George Street, although there has been little rent and capital appreciation in this area in recent years. In contrast, large format and trade retail properties have experienced solid tenant demand, rental growth and lower vacancy rates compared with George Street, Bezett said.

“George Street retail has had a challenging few years with pressure on household budgets and disruption from the lengthy council streetscape revitalisation project. The expected improvement in consumer spending should help improve conditions for George Street retailers and leasing agents are also reporting demand from international chains for retail space, which is very encouraging.”