New CBRE research on yield outlook shows opportunistic buying window is closing

The current cycle of interest rate cuts is expected to result in prime commercial property yields beginning to fall from early next year, according to econometric analysis from CBRE Research.

CBRE’s just-released New Zealand Market Yield Outlook Update looks at how two key trends affecting the commercial property market – declining interest rates and weakening rent growth – will influence property yields as the market climbs out of the current cyclical trough.

The findings indicate a more competitive buying environment on the horizon, with the window for investors to acquire assets at the current low point in the cycle closing.

Zoltan Moricz, CBRE Head of Research, said he and his team analysed the historic relationship between swap rates and property yields during cyclical turning points to predict yield movements over the next two years. 

“Our robust analysis of the last two cyclical turning points shows that swap rates exhibit a close relationship with yields during these periods, rather than 10-year bond rates which have the closest long-term relationship with property yields across cycles. Our modelling indicates yields respond to changes in swap rates with a delay of two quarters,” he said.

“It also shows that while market rental growth prospects do affect yields, interest rate movements are a more powerful influence. Interest rates’ influence on yields is 2.6 times stronger than rental growth.”

After falling by around 150 basis points since late June, CBRE expects two year swap rates to decrease more gradually during 2025. At the same time, average prime commercial and industrial property rents are forecast to decrease by -3.7% from late 2024 to the second quarter of 2025, but will then rebound, with growth of 3.3% expected in 2026. 

Based on these swap rate and rent growth forecasts, yields are forecast to begin to reduce from their current high point early next year. Average prime commercial and industrial market yields are expected to firm by 30 basis points to 6.5% by Q1 2025, and reduce more gradually to 6.13% by the end of 2026.

This demonstrates a strong opportunity for investors to acquire assets before the next cycle of yield contraction begins, said Tim Rookes, Managing Director of CBRE Christchurch. 

“The closing of the opportunistic buying window suggests a shift towards a more stable and possibly competitive market environment from next year.”

CBRE is observing a greater level of investor sophistication emerging at this point in the cycle, with buyers reading the economic outlook and identifying opportunities to make long term value and income growth plays in Christchurch, he said. 

“There is energy in the investment market among well-capitalised buyers who are looking to take advantage of the improving cost of debt and make acquisitions based on a long term view on rent growth and yield tightening.”

Increased enquiry levels from investors seeking office and retail property in Christchurch is expected to meet with a greater choice of assets for sale as landlords become more willing to transact and meet the market, said Rookes.

“The debt market is now more supportive of investors which is contributing to increased confidence. At the same time there is a significant volume of investment product preparing to enter the market as owners respond to the greater level of positive sentiment and market conditions become more conducive to divestment.”

Matthew St Amand, Managing Director of CBRE Wellington, said that while vacancy levels are a challenge for the city’s secondary-grade CBD office market, the premium end of the market remains tight and has stable long lease fundamentals.

Investors are also looking at opportunities to capitalise on expected future value uplifts as yields contract and rents eventually return to a growth trend.

“Investors have been waiting for the debt cost to property yield spread fundamentals to return and with mid-term swap rates suggesting all-in debt can be sourced at sub-6%, the spread is starting to look attractive. For investors who can read the market, match assets to their risk mandate and buy ahead of the forecast yield firming, there is a definite value opportunity.”

With some landlords under pressure to recycle assets to replenish debt and restore their balance sheets, there is plenty of choice in the market for investors willing to ride out the current challenges and chase yield at a time when buyer competition is thin, he said.

“CBRE’s forecasts point to the next six months being possibly the best time to buy out of the entire cycle. We can safely say the market has bottomed out and while secondary office vacancy still presents a significant challenge, the immediate value opportunity presented by the timing of this cycle and the ability to navigate acquisition activity towards lower-risk lease profiles or value-add projects offers a strong opportunity to those with capacity.”

In recent years, rising opex and seismic concerns have presented challenges to investors in the Wellington CBD office market. However, evidence that insurance costs are levelling out, as well as government reviews of the earthquake-prone building system and ‘yellow chapter’ guidelines are likely to result in improving investor confidence around these issues, he added. 

A further important consideration for the market is how the firming in market cap rates during 2025 and 2026 may flow through to actual portfolios, says Moricz.  

“While market cap rates may firm by the forecast 70-odd basis points to the end of 2026, the magnitude and timing of valuation-based cap rate improvements could be quite different,” Moricz adds. 

The projected firming of prime cap rates indicates a potential increase in property values, which could impact investment strategies. However, individual asset and portfolio valuations indicate that property values will not improve universally across the market.  

The strongest value uplift will be for properties where current valuations reflect the full extent to which the market softened in the past three years. In cases where current book values remain above market, the benefits of the improving market yields will take longer to flow through.