Industrial space shortage threatens economy

There is a serious shortage "big shed" A-grade industrial buildings like this one at 13 Ha Crescent, Wiri.

A shortage of suitable industrial space throughout Auckland could curb the economy's growth potential in the coming year, warns Zoltan Moricz, senior director of New Zealand Research for CBRE.

Commenting on the results of the agency's latest industrial vacancy research data, Moricz says companies looking for Auckland industrial space to lease could be struggling to find it after last year saw the most significant decline in vacancy rates in seven years.

CBRE's latest research shows that industrial vacancy across the city declined by a third during the past year - from 3.7 per cent in December 2013 to 2.5 per cent in December 2014.

The Auckland industrial vacancy rate is now the lowest since 2007 and the region needs more "big sheds," Moricz says.

"The market has been especially active in the last six months, with new supply and absorption peaking in the second half of 2014. Although new supply lifted total industrial stock by a net 140,000 sq m this year - somewhat above the last five years' average - it was more than offset by demand, with net absorption totalling 280,000 sq m.

"This is by a large margin the strongest annual take up since the onset of the global financial crisis," Moricz says.

"Supply and demand have concentrated in East Tamaki, Mt Wellington and the Airport Corridor - accounting between them for 90,000 sq m of new stock. The largest of these were James Kirkpatrick Group Limited's Leon Leicester development of over 27,000 sq m in Mt Wellington, the 16,500 sq m Metroglass premises in East Tamaki and the 12,000 sq m DHL premises in the Airport Corridor."

Moricz says that the prime A-grade market vacancy of just 1.2 per cent is exemplified by the fact that every one of the 25 new buildings completed in the second half of 2014 was taken up by the end of the year, despite some being built on a speculative basis.

"Although demand is concentrated in the prime quality A-grade buildings, with 158,000 sq m of net absorption in the past year, it is also spilling down to better B-grade better secondary quality premises - largely driven by a lack of available prime space.

"B-grade space has experienced nearly 100,000 sq m of net absorption which, in combination with little new supply, led to a substantial portion of the existing B-grade vacancy disappearing from the market - declining from 5.3 per cent to 3.3 per cent during 2014."

Interior of "big shed" A-grade industrial building at 13 Ha Crescent, Wiri.

Looking ahead, Moricz says that demand and vacancy patterns indicate a ready occupier market for increased supply.

"Combining the speedy take up of all recently completed new buildings with a low prime vacancy rate; and strong take up and substantial fall in the vacancy of better quality secondary premises, it suggests the Auckland industrial occupier market is ready for an acceleration in the supply of new buildings.

"Economic growth in 2015 is forecast remain above average and surveys of both capacity utilisation and intentions to take on new productive capacity indicate the occupier market is ready to absorb new industrial stock."

Moricz says the emerging situation in the industrial property market means the low vacancy and low supply situation into 2015 will restrict choices for occupiers seeking business space. They will probably have to make compromises and "sub-optimal choices" in relation to preferred building specifications, sizes and/or locations.

"With capacity pressures becoming an increasingly significant constraint to businesses, lack of suitable business space could curb the economy's growth potential in the coming year," he says. "This environment will also tilt the balance of power in the industrial property market towards landlords, which implies that industrial occupancy cost inflation will be well ahead of general inflation.

"There is likely to be insufficient A-grade industrial warehouse space available over the next 12-18 months. We're seeing requirements for improved specs relating to floor loading to ensure maximum cubic capacity plus efficient and workable facilities with truck access and canopies. Although we are seeing some speculative development taking place across South Auckland, occupiers need to plan ahead if they want to secure the space if it is new or the quality that they need."