-Greg O’Brien and Mitchell Ryder, Associate Directors, Industrial and Business Services, Christchurch. Savills New Zealand.

The current industrial property market in Christchurch is perhaps best described as a multi-layered beast. As a result of the Christchurch earthquakes and the need to complete structural strengthening, local vendors and landlords became some of the most experienced in the country when it came to understanding the performance of their asset.

We are seeing this expertise play out as quality stock is sought and business cases for new builds wait for their moment.

Against this backdrop, 2024 is already heralding good news. The market is buoyant, people are paying great money for land, and while demand is intense, we are steadily finding the stock to meet it.

The state of the current warehousing market

In the small to medium range – warehouses 250sqm to 1,500sqm – there is a steady flow of activity. Businesses are looking for opportunities to upsize and to consolidate multiple leased warehouse spaces, often located a few doors down from each other, or to split themselves across the city to service growing client bases.

The lack of available stock across the city affects the amount tenants are being required to pay; this in turn drives the market rental evidence for valuers as they advise landlords as to the new rates when the time comes for the scheduled market review of rents.

Some tenants have been encouraged to look for cheaper alternative warehouses as their existing landlords look to maximise their returns. Warehouse options in this range are tight, and properties listed on platforms such as TradeMe are often long spoken-for, as tenants find to their frustration.

In the medium to large warehouse range – 1,500sqm to 3,000sqm – we are observing available stock being limited for a range of reasons, such as the wrong location or warehouses not being fit for purpose. For instance, a warehouse designed for engineering may not be tall enough for a distribution tenant to install racking, or there is insufficient yard space for container storages or an excess of redundant space such as offices, which tenants pay for all the same.

Some tenants want to shift from leasing to owning their own warehouses but are finding no suitable options in the market to purchase.

We see businesses in this range having often completed business cases with their accountants/banks to undertake a new purpose-built project and then waiting until conditions improve. Some of these decisions are two years old now and businesses are still waiting.

In the large warehouse range (3,000sqm+) there is likewise limited existing stock. Third-party logistic (3PL) businesses will act as a distribution centre (DC) for a business (such as Kmart or Farmers) which doesn’t want to lease a premise of their own.

These 3PLs may then have a DC requirement in this range, dependent on winning the DC contract, so a search of the market is often done before or during the tender process. This presents challenges as the timeframe to complete a new build is 18 to 24 months and the DC contract usually commences well before a new building can be ready to occupy.

We are receiving increasing interest from international tenants in the large warehouse range wanting environmentally sustainable premises to meet their corporate requirements. We expect to see 5 Star+ Green Star rated buildings coming along in the near term.

The opportunity for developers

The scarcity of stock and weight of demand presents a prime opportunity for one cohort in particular: industrial developers who are prepared to build on spec – straightforward warehouse layouts of 1,000 to 3,000sqm, potentially including small offices that can be moved around in the space.

This has been done several times before – at Waterloo Business Park, for example, Southpark created a large speculative three building development on Islington Avenue. Calder Stewart also did another similar build recently at 14 Establishment Drive in the Hornby Quadrant development which was one big warehouse with provision for office space.

If there are two tenants, you can simply put a firewall between them, which demonstrates the flexibility of this kind of build and how space can be deployed.

In an environment of very high occupancy and low vacancy rates, spec building is a case of ‘build it and they will come’ – but there does need to be a shift in thinking among tenants as to rental rates. No longer does clear span, high stud industrial warehousing lease for $85 to $95 per square metre; the market is seeing $140 and higher.

Tenants have to accept that is the new level before developers are prepared to come in droves; they are not willing to make the capital expenditure and have new builds then sit vacant waiting for tenants to adjust their expectations.

The good news is this shift is already happening, and we are seeing these new rentals rates being achieved. This will continue.

With this shift we are keen to see more developers step in and have confidence that the increases in industrial land value and construction costs will be matched by rental rates.

The areas of demand

Aside from the aforementioned details of warehousing demand, location is a huge factor for businesses. As far as they are concerned, the ideal facility in the wrong location counts for nothing.

There is demand for freehold land and buildings near the airport and in the north-west industrial corridor leading up to the Waimakariri River. On that note, competition would be beneficial in the market with the likes of the airport development providing lease-only options.

For now, if large owner/occupiers or tenants require 3000+sqm of warehouse near the airport, there is only one place to go.

Much of the industrial land in this area is held by Environment Canterbury and available only by short-term or perpetual ground lease. This deters many from building improvements such as warehousing on leased land, as well as the unfamiliarity of perpetual leases – business owners don’t like what they don’t know, and perpetual leases fit neatly into this category.

Rezoning of undeveloped land in Canterbury for industrial use is a huge focus for our team, and there are obvious areas where this should happen. It is part of the key to unlocking the activity among developers for new warehousing to address supply issues.

When you start combing through the undeveloped land you come up against a couple of obstacles: one, it is already in the control of a small group of companies, or two, the development horizon is distant, often because a lot of land works are required to make it viable, such as with leftover pieces of land from motorway development.

Still, it needs to happen and is happening – a good example is the rezoning of six hectares in Selwyn for industrial use.

Christchurch City Council and Christchurch Airport can add a lot of value here. The land within the airport industrial park is all but gone, indicating something has to give there; and in the greater area of Hornby and Wigram there are large tracts of land next to business parks that are crying out for rezoning opportunities.

In terms of the current state of supply in the Christchurch industrial property market, prime A-Grade is sub 1%.

Our predictions for 2024

A recurring theme in commercial and industrial property is that virtually everything is taking longer than predicted; from the pace of the recovering economy, to leasing a building, to selling a property.

We see and hear a lot of growing confidence among business of all sizes, and as we start to see key financial indicators, such as the OCR, interest rates, and inflation, improve over this year and into 2025, this will validate business decisions to push ‘go’ on their plans. However, there is hesitation – no one wants to be the first sheep through the gate. Those that have been focusing on their balance sheets over the last while will be well placed to move with confidence.

We will start to see signs of more freehold land coming to the market. Opportunities to buy and sell will remain available but not all of them will want to be actively marketed via campaigns or platforms such as TradeMe. While the market appears tightly held, many remain open to selling or acquiring more if they can do so without making a scene.

It’s a common theme with Kiwi property owners to want to get an outcome without generating too much fanfare, but an on-campaign approach is often exactly what is required to get the result in the current market.

What are the types of companies  interested in the Industrial/ large real estate space in Christchurch?

 Many companies see merit in being located in Christchurch for a variety of reasons whether it be for one of the most obvious reasons; land is much cheaper and more plentiful than in Auckland for instance, or for more industry specific reasons like 3PL and large format manufacturers who greatly benefit from inland port facilities in Rolleston.

 If you saw the space as suitable for tech companies (drone manufacturers etc) then those companies might relocate to Christchurch?

 One of the main reasons we would see as to why a whole company would relocate to Christchurch would be for employee benefit. Christchurch, when compared to Auckland and Wellington, has a more affordable residential housing sector, has far shorter transportation times (due to lesser traffic) and the overall vibrancy of this modern city’s amenities including schooling, university, recreational activities and events which are superb.  

 If rent was lower than, say in Auckland or Wellington, then relocating might become more of a reality?

 Christchurch’s A-Grade industrial rental rates are considerably cheaper than in Auckland and the council rates (especially in Rolleston, Selwyn District) are far more affordable also. Ultimately there are a plethora of considerations a business must face prior to relocating and if key points are property costs and staff wellbeing; Christchurch will feature well.