National Economic Trends March 2020

New Zealand’s economy continued to grow over the second half of 2019 albeit at a slower pace. Expectations are that this will end abruptly as the impact of COVID-19 flows through to the economy in 2020 and 2021. Economists are now forecasting a recession during 2020 with estimates of the fall in GDP ranging from -3% to -9%. The size of the range of the forecasts demonstrates the current level of uncertainty over the length and severity of COVID-19’s impact on the economy. The potential impact of the COVID-19 outbreak on our economy represents an significant downside risk which will impact heavily on some sectors including transport, accommodation, tourism, and hospitality. The size and duration of its impact is unknown.

Countering these economic headwinds are current low interest rates, plans for increased Government spending on infrastructure, wage subsidies for adversely effected sectors of the economy, loans to Air New Zealand, increased beneficiary payments with more announcements in terms of the level of support for the economy to come. Unfortunately, along with a fall in economic activity, unemployment is also expected to increase. The Reserve Bank has recently moved to ease monetary policy settings and maintain liquidity in the money markets, and engage in quantitative easing. These developments will have a flow on impact on property market activity. 

Table 1 presents the trend in key economic indices rates over the last two years

Table 1: Interest Rates

Source: RBNZ, ANZ, and Westpac

Auckland’s regional economy has been one of the better performing regions in the country.  In the medium term, Auckland’s economy will bounce back from the COVID-19 disruption. However, the short term impacts will be significant and are impossible to predict. 

Retail Property

The operating environment for retailers has become more challenging in the current environment in the first quarter of 2020. While some have experienced a surge in turnover as customers have sought to ensure they have sufficient resources to endure the COVID-19 lockdown and increase resources so they can work from home; others have seen turnover fall by over 50%.

Businesses facing the most significant impact on their turnover include the tourism sector, hospitality, accommodation sectors. In addition, the turnover of cafes, restaurants, bars and takeaway outlets has fallen and now face closing for at least four weeks. These businesses may struggle to remain viable even with the assistance they will receive from central Government. It is likely they may ask landlords for short term rental relief which will impact on their returns and ability to meet debt commitments. Landlords may have to choose between demanding full contractual payments and potentially ending up with vacant premises as tenants fail or reaching an accommodation with their tenants to keep them in place.

Supermarkets, pharmacies, and liquor stores have experienced a surge in sales with stores struggling to keep their shelves stocked in order to meet customers needs. In addition, technology and office furniture stores have seen significant growth in sales as individuals and businesses buy products to enable their staff to work from home.

Table 2 summaries key retail property market metrics.

Table 2: Retail Property Market Metrics

The outlook for the retail sector is uncertain. Some retailers will struggle to survive the COVID-19 impact on their business which will have a flow on impact to their landlords. COVID-19 will have a significant impact on the economy and the size and duration of the impact is unknown. Unemployment is likely to increase and times will be tough for some households which will impact on their retail spend. In the medium term the retail sector will recover as economy activity bounces back once the impact COVID-19 fades.

Industrial Market

The industrial property market has performed well over the last decade. Underlying market fundamentals at the end of 2019 remained strong with low levels of vacant space, steady rental growth, the firming of investment yields, a shortage of developable land in prime industrial precincts, and an upswing in development activity which are all the typical characteristics of a late market upswing. The impact of COVID-19 on the industrial sector is likely to be less severe than retail. Well capitalised tenants should be able to trade through the predicted COVID-19led recession. Tenants occupying industrial space and associated with servicing the hospitality and tourism sectors may struggle.

Demand for industrial space will bounce back once Auckland’s economy recovers from the predicted downturn in activity. Ongoing investment in Auckland’s roading and transport infrastructure will also impact on the industrial market. As the roading network improves it will increase the accessibility of a number of industrial precincts and shift some of the activity around the urban area. However, South Auckland’s precincts are likely to continue to attract the bulk of activity.

Over the last six months developers have responded to the shortage of space and growing tenant demand.  However, land prices and development costs have continued to increase, putting pressure on their profit margins. Readily developable sites in preferred precincts are in short supply. Consequently, even with the firming of yields, the rents required to justify new developments have continue to increase putting pressure on tenants’ ability to pay. In the short term, supply is unlikely to catch up to the growth in demand. Owner occupiers have also remained active in the market taking advantage of low interest rates to secure premises for their businesses.

Table 3 presents key industrial property market metrics

Table 3: Industrial Property Market Metrics

In the short term activity in the sector is likely to be disputed as both tenants and investors wait to see the size and the duration of the COVID-19led recession. In the medium term the sector’s strong underlying fundamentals mean it will bounce back once the regional economy begins to recover. 

Office Market

Auckland’s CBD and Metropolitan office markets are entering the COVID-19driven recession in a strong position. Vacancy rates are low by historical standards, rentals have been increasing albeit at a slow steady pace, and investment yields have firmed. In addition, developers have responded to these strong market fundamentals with increased development activity both inside and outside the CBD. In the near term as some of the larger CBD projects are completed central city vacancy rates may rise.

The uncertain outlook for both the national and Auckland region’s economies will have an impact on the office market. Some smaller businesses may struggle and there maybe a period of right sizing within larger organisations as they adjust to the changing economic environment. Initially businesses are responding by increasing the number of staff working out of the office. This may have some longer term implications for the way in which they organise their staff in the future and could lead to a fall in their office space requirements as staff continue to work from home post COVID-19. In addition, shared space providers may experience a fall in occupancy as small businesses move to reduce their overheads and work from home. 

At this stage of the office market cycle the underlying market fundamentals of both the CBD and Metropolitan office markets are robust. The office building investment market has remained strong. Competition between investors has led to slight firming of yields. Investors have continued to achieve strong investment returns.

In the short term, the COVID-19driven recession we are forecast to experience will have an impact on the market as tenants adjust to different ways of keeping their business operating which may lead to a reduction in office space requirements. The future has become a more uncertain place, however the office market will recover in the medium term as economic activity bounces back.

Table 4 presents key office property market metrics

Table 4: Office Property Market Metrics