'Split' office market as supply builds

DIVERGENT MARKET: The Business Hub, to house eight business development agencies in the former Big Save retail outlet in Ahuriri under renovation (pictured), further exacerbates Napier and Hastings oversupply of office space. PHOTO/PAUL TAYLOR

THE Napier and Hastings office real estate market is strongly split and under-performing buildings could be a competitive advantage for the region, says Turley & Co's biannual report.
Due to interest in buildings with a high seismic rating, Napier and Hastings have an oversupply of office space due to "a surprising burst" of speculative office development after the Global Financial Crisis.
Older stock was "naturally relegated", leading to a continued split in rent levels.
With only a limited rise in demand there was a "redundant supply", with the new Kiwibank centre in Hastings, due to officially open on Friday, typifying a trend to choose modern offices with a $1.5 million redevelopment.
The medium-term outlook was "fairly bleak" for the mid to lower end of the market, especially if the seismic rating was below 65-70 per cent of the New Building Standard.
"We now have a strongly differentiated office market in Hawke's Bay," the report said. "Market value decline for waning tenancy prospects has to be expected for some office properties. This change over 2012-14 has been significant in some cases."
For new or higher-rated buildings in the upper-third sector, the market was "much healthier".
"The silver lining for lower-quality offices (second and third tier markets) is the improved rents-cost economy for many existing businesses and start-ups. "The mid-market upgradeable offices supply is a Hawke's Bay competitive advantage. Hastings District Council is working to capitalise on this further to its Kiwibank success focusing on call centres."
Ahuriri continues to grow in popularity at the expense of the Napier CBD. Overall demand was weak and in most categories supply abundant.
"There remains quite intense competition for office tenants who are generally in the box seat. This seems set to continue at least well into 2015-2016. But new building costs means a firm floor in respect of required rent in new building cases."
In the retail sector it said 2014 was a good year for retail investment property transactions, considering well-tenanted investment properties "rarely present in the market for long [if not at all]".
Occupancy in prime Hastings locations had improved over the second half of last year and rents were "mostly stable" but the fringe was weaker.
The shipping container retail development in the former Albert Hotel was reportedly 50 per cent pre-let.
Napier experienced "considerable improvement' in 2013-14 for mainstreet and fringes renewal/intensification but a "heated CBD development rush" had softened.
"Hawke's Bay is presently experiencing a large bulk-retail activity spike, spurred on by national and Australasian retailers competitive repositioning."
"The Farmers shift has bolstered Napier's retail heart and improved the stature of Hastings St, as an important CBD and Marine Parade retail link. Lower Emerson St continues to feel the pinch from this re-shuffle.
"Farmers' actions initiated many Hastings St developments including neighbouring Paxies site into four retail tenancies. Opposite the Farmers-Paxies site at the corner of Dickens and Hastings streets, was the three-storey Commercial Building built in 1908 (an earthquake survivor), now demolished and reconstructed into a new split-level retail complex anchored by Kathmandu."
The Village Exchange hotel development in Havelock North was "one of the most significant local developments in decades" and would reshape and bolster Havelock North once completed in 2017.
In the industrial sector there was a good level of new industrial buildings "relative to soft economic conditions" especially in Napier.
Land values were stable and prime industrial property investment keenly contested.
Multi-million dollar winery investments reflected a return of confidence to the sector.
In New Zealand for most of last year private investors led investment property acquisitions, but increasingly institutions and offshore buyers "have waded in".
"Over $3 billion worth of New Zealand commercial-industrial property transacted in 2014. Three of the largest sales recorded were to Kiwi investors as relatively modest interest rates fuel the markets. Albeit, there is unprecedented levels of overseas capital flooding the country, primarily in Auckland markets as offshore buyers secure investment properties in a well performing climate where growth is anticipated.
"Construction costs inflation is apparent including timber price rises and shortening builder capacity. This will reset even higher levels of new building costs.
"Property values of good investment characteristics and for absolute prime-quality yields continue to be firmer."