Commentary

There tends to be a close correlation between commercial and industrial property vacancies and the strength of the economy. This is particularly true of office vacancies which closely align with unemployment. Covid-19 may also see more firms allow staff to work from home. We expect to see both reduced new office demand due to the weakened economy and some firms closing or reducing their footprint, overall shrinking demand. We expect office market rent will reduce as a result, with vacancies most likely in B and C grade space. Recent years have seen the increasing importance of Ahuriri being a prime office location in Napier, and Havelock North as an alternative office location to Hastings. We expect little new development to occur in these locations in the near term.

Although landlords are unlikely to be in a position to be picky with who they lease office space to, we expect there to be a widening of the yield spread based on tenant covenant with well leased office to strong covenant credit rated tenants, who can be relied upon to carry on trading in the current environment and government tenants, seeing less change in capitalisation rates.