Knight Frank - Property View - Spring 2016

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Industrial Market
Overview
Strong Demand Exceeds Supply
Occupier demand continues to grow
as the construction, manufacturing and
distribution sectors remain buoyant
given the strong economic climate and
business confidence. Occupiers are
continually searching for higher quality
and larger premises with supply unable
to keep up with the increased demand.
This has caused vacancy rates to fall
to record low levels across the board
with current vacancy levels in Mount
Wellington, Penrose and Onehunga
showing the biggest decline currently
below 2%, whilst vacancy within East
Tamaki has remained low currently
below 3%.
Developers who have land banked
essentially control new supply and
are seeing the benefit of their actions
from increasing land prices and an
increased buyer pool of investors
seeking out modern buildings with
strong tenant covenants. The lack
of industrial zoned land available
for development has caused prices
to increase to upwards of $400 per
square metre in the popular South
Auckland localities increasing to over
$500 per square metre for centralised
localities. The increasing cost of land
coupled with increased construction
and labour costs is causing pressure
on the margins for a number of
developers causing further pressure
on supply.
As the land in the popular suburbs
continues to be increasingly scarce,
there has been an increase in the
number of occupiers and developers
purchasing land further abroad from
the popular localities in order to meet
their size and cost requirements. An
example is the new industrial area
along Oruarangi Road, adjacent to
Auckland Airport which is becoming
increasingly popular with occupiers
given the large site sizes and close
proximity to Auckland Airport. Land
values in the area continue to rise;
Knight Frank has recently sold a 1.04
hectare site at 576 Oruarangi Road,
Mangere for $380 per square metre.
Comparing this with the price that
would have been achievable 18 months
ago in the vicinity of $250 - $300 per
square metre, it is evident land value
prices are growing at a rapid rate.
Knight Frank forecasts land value
growth will continue through 2016.
The Auckland industrial market has
been very positive heading into 2016
as the unprecedented demand from
both occupiers and investors has
caused constraints in the market.
Vacancy rates are continuing to decline to record lows as
new supply has struggled to keep up with demand with
development being slow for the past 24 months. As a result
the rental market has heated up with industrial rentals rising
sharply over the past 12 months as occupiers are struggling
to find space. The high occupier demand, low interest
rates, strong investor confidence and competition between
occupiers and investors has caused sale prices to rise and
yields to contract to record levels. The market is showing
little signs of slowing with 2016 looking to be a record year.
FIGURE 1
Percentage of properties per suburb
FIGURE 2
2016 vacancy % outlook
FIGURE 3
Auckland building consent values – factories, industrial & storage
Current Stock and Building
Consents
The following charts outline the
total number of properties and total
floor area per suburb. For the South
Auckland Industrial areas, East Tamaki
leads the way with 32% of the total
number of industrial properties and
caters for 27% of the total floor area.
Penrose Mt Wellington
Onehunga Manukau/Wiri
East Tamaki Airport
Industrial Rents Surge
The strong occupier demand coupled
with the shortage in supply has
caused South Auckland Industrial
rents to surge across the board. Rental
levels of prime and secondary grade
properties have increased over the
past 12 months, with new design and
builds in the central localities leading
the way. Knight Frank is aware of prime
industrial buildings reaching levels
of upwards of $125 per square metre
for warehouse space and $230 per
square metre for offices. We anticipate
the trend likely to continue throughout
2016 whilst vacancy rates remain at an
all-time low. The secondary industrial
market is receiving the overflow
benefits from the lack of prime stock
available. With strong demand for
prime quality space, coupled with the
shortage of supply and the resultant
increase in rentals, some occupiers
are looking to secondary stock and
carrying out purpose built fitouts and
alterations. The result being that rental
levels and demand for secondary
stock has increased greatly over the
past 12 months with rental rates in
the main South Auckland Precincts
ranging from $85-$100 per square
metre over the warehouse.
Landlords are becoming more
Charles Vaughan
Registered Valuer
+64 9 377 3700
Tim Gemmell
Director – Valuation,
South Auckland
+64 9 377 3700
15%
15%
32%
14%
16%
8%
July 2016 Vacancy %
Penrose/Onehunga 1.9%
East Tamaki 2.7%
Mount Wellington 1.2%
Manukau/Wiri 2.4%
Airport Corridor 1.9%
2012 2013 2014 2015 2016
$
$50,000,000
$100,000,000
$150,000,000
$200,000,000
$250,000,000
$300,000,000
$350,000,000
$400,000,000
$450,000,000
East Tamaki is also the home to the
Goodman owned Highbrook Business
Park which commenced construction
in 2004 and has been very successful.
Set over 107 hectares, it delivers prime
commercial and industrial design and
build leaseback space options.
The upward trend for industrial
building consent values has continued
with Q3 2015 – Q2 2016 seeing 149
applications totalling nearly $340
million dollars. The building consents
from the last 12 months show that just
over 330,000 square metres of new
industrial stock will be introduced to
the market in the coming 12 months.
There has been a consistent trend of
increasing building consent numbers
over the past 24 months as the new
supply struggles to keep up with
demand. The increasing trend in
new supply is likely to continue over
the next 12 months as a number of
the heavyweight developers such
as Goodman, Southpark, James
Kirkpatrick Group Limited and AIAL
look to take advantage of the strong
occupier demand with new design
and builds. The indications are the
increased new supply will assist in
easing the current shortage as the
buildings become available in 2017.
aggressive in their approach to letting
up premises compared to 24-36
months ago. The low vacancy rates
have meant incentives have all but
disappeared from the market place
where they were typically present
after the GFC. The length of lease
terms have also increased with
occupiers being required to sign
up to longer lease terms in order to
secure premises given the increasing
competition. This coupled with the
lack of alternative premises to move
to at expiry has well and truly made
it a landlords market. The increase in
rentals here also meant tenants have
to stomach sizeable rental increases
as market review dates fall due.
Knight Frank has seen evidence of
rental levels increasing at a rate of
over 5% per annum in the past 12
months. We anticipate this trend to
continue throughout 2016; however
with the new supply coming online
in 2017 we expect the inflationary
pressure to slow.
AUCKLAND AUCKLAND
8 PROPERTY VIEW 2016 9