Low levels of consumer and business confidence, high inflation, rising interest rates and the risk of capital loss (or low to no capital gain) on property investments in the next 6 to 12 months, have caused many participants in the Hawkes Bay commercial/industrial property market to pause and reassess investment decisions. These factors are affecting both owner occupiers and investors. Transactions continue, albeit at lower volumes.

The market retrenchment follows a period of very strong growth due to falling interest rates over a prolonged period and loose monetary conditions, which lasted, despite Covid 19, through to late 2021.

Demand however has been sector specific, with office and retail seeing weaker demand, while industrial has been strong.

Industrial properties remain in strong demand, driven by growth in the horticultural and farming sectors, where confidence remains strong. Rental rates have risen sharply over the past few years, outperforming other sectors, however it remains to be seen if this rental growth can be sustained. Several developments on both greenfield and infill land have been met with strong demand, and quickly filled. While the industrial sector has paid little premium in recent years for well medium to longer lease terms, due to strong owner occupier demand, we expect well let property to outperform owner occupied property with rising interest rates and softening economic conditions. Much of the industrial demand in Hawkes Bay is driven by local domestic demand. Softening residential market conditions (as currently being experienced) can forecast declining fortunes in the industrial sector. Industrial land values have risen at the record pace in the past couple of years through to mid-2022, however anecdotal evidence suggests that the depth of demand is now reduced. The supply and demand are believed to be closer to equilibrium.

Commercial office is experiencing a reduction in demand, with several businesses downsizing as working from home become partially or fully adopted. Further, new space has been supplied in select locations such as Havelock North, pushing vacancies up for secondary quality space or less sought-after locations. Quality and/or well located office rents appear to be holding firm, however secondary quality space is coming under downward pressure, with plentiful choices available to tenants willing on a tight budget. There has been little new stock come on stream in Napier in recent months, but demand is soft, and many vacancies have been prolonged.

Commercial retail has been location sensitive but has generally experienced some downturn. The Napier CBD has been affected by the absence of the international visitor (particularly cruise ships) trade, and secondary locations such as Taradale are experiencing increased vacancies. Hastings was perhaps less effected by the drop off in international tourism, and has performed reasonably well, with an ongoing trend in the eastern sector to service retail. Havelock North continues to achieve near full occupancy, with growing supply being quickly let in the service sector. Large format retail appears to be back to business as usual, with few vacancies in Hawkes Bay in this format. Rental levels have been reflective of the comments above.