Commercial property transactions expected to increase as interest rate pressure eases

Changing commercial property conditions are prompting a shift in the market as interest rate pressure on capitalisation rates begins to ease, according to CBRE’s latest Christchurch Figures research report.

Buyers are now considering more than just interest rates in their pricing decisions. This includes recent shifts in supply and demand conditions and their impacts on vacancy and rental growth rates across the main commercial property sectors, said Jorge Chang Urrea, CBRE Research Manager. 

“Changes in the commercial property market are influencing buyer behaviour to a greater degree, now that interest rates have peaked. Our research also shows the rate of commercial property yield increases in the last quarter was the lowest since the Reserve Bank commenced its monetary policy tightening cycle in early 2022, with yields having stabilised across most sectors of the market in the second quarter of this year.”

CBRE’s report states that with many activity indicators at recessionary levels, challenging economic conditions will continue for the next few quarters. However, there may be a silver lining, with the economic pressure potentially leading to quicker interest rate cuts. 

Tim Rookes, Managing Director of CBRE Christchurch, said that despite some recent surveys and commentary showing improving business confidence, businesses will continue to face challenging headwinds.

“There is more pain still to filter through the system and the Christchurch property market is not immune, especially given the city’s large owner-occupier component, notably in industrial property. However, any positivity is to be welcomed and it is heartening to see pockets of strong market performance across the city, including prime CBD retail and office property.”

ANZ’s August Business Outlook survey showed a dramatic increase in optimism, with business confidence soaring 23 points to +51, the highest level in a decade. 

“The fact that the large increase in confidence was already evident in the two thirds of survey responses received before the Reserve Bank’s August OCR announcement shows it was not just simply a bounce in confidence in response to the rate cut,” said Rookes. 

“Positive messaging from the Reserve Bank indicates some definite signs of recovery, while the easing interest rate environment should give more confidence to kickstart business investment over the next 12 to 24 months and help the sector face the challenges ahead.”

Some property owners will face intensifying pressure to sell in the coming months. The subsequent transactions will offer insight into where the remaining difference between buyers’ and sellers’ price expectations will eventually balance out, the Figures report states. Commercial property sales volumes are expected to increase further in late 2024 and into 2025 as buyers and sellers become more willing to engage and move towards the ‘meeting of the minds’ required to transact, Rookes said.

“The long-awaited end to interest rate increases has triggered greater numbers of investors keen and ready to buy, adding to the significant capital that has been waiting to find a home throughout the downturn. This increased buyer confidence will prompt sellers to become more market-aligned. We expect this to result in an uptick in transaction activity in the coming year.” 

CBD office market

CBRE’s Christchurch Figures research for the second quarter of 2024 shows a slight increase in overall CBD office vacancy, from 3% to 3.7%. However, vacancy in prime-grade offices decreased from 3.1% to 2.9%. Prime office property in the core CBD precinct (roughly bordered by Kilmore, Madras, Lichfield and Durham Streets) had just 0.7% vacancy. Prime CBD net effective rents in June 2024 were 2.2% higher than a year earlier.

A substantial amount of additional prime office space is entering the market between 2024 and 2026, across various new construction and refurbishment projects. This is likely to push vacancy levels up, however strong tenant demand means this is expected to be temporary.

Retail market

The prime CBD retail market continued to benefit from high demand and extremely low vacancy in the second quarter of 2024, especially street-front premises on Cashel and High Streets. This resulted in very high rental growth in this sub-market in the second quarter, with face rents up 14% compared with the first quarter of the year. This follows a period of little change in rents. 

Industrial market

Industrial vacancy began to rise in the first half of 2024, following a period of extremely low vacancy over the past year and a half. Industrial vacancy was 1.4% in June 2024, up from 0.6% in December 2023. Demand for industrial space has become more subdued this year, combined with some larger occupiers downsizing and/or subleasing part of their premises. Industrial rents were stable in the second quarter of this year, following gradual growth since late 2021.