Globally and locally there’s uncertainty in the commercial real estate sector. Interest rates and inflation are rising, and organisations are still working out what their offices will look like in a post-Covid world. BNZ’s Phil Bennett ponders seven likely trends for 2023 | Content partnership
1. It's a cycle
Whatever’s going on in the economy, there’s one thing you can rely on - the property market is cyclical. And Phil Bennett should know. Bennett, now general manager of property finance at BNZ, has more than 40 years’ experience under his belt and is managing a commercial property portfolio worth $10 billion.
“If you think of November 2021 as midnight, we’re now at around 4am, in the dark of early morning. It’s an unpleasant time to be awake. But there’s daylight ahead and property remains a sound investment.”
Some property prices are continuing to fall, Bennett says, and we may have higher interest rates for longer than expected, but he predicts the market will stabilise, to use the clock analogy, once we get to daylight hours.
2. Quality matters
Even when times are tough, people are still going to want quality property, Bennett says, and his view is echoed by global commercial property agency CBRE. The company’s 2022 market outlook found positive occupier demand for good quality space.
Across Auckland, Wellington and Christchurch, ‘net absorption’ (a commercial real-estate term measuring the amount of space tenants physically moved into minus the amount of space tenants physically moved out of during a specific period) of prime space exceeded 50,000sq m in 2021, after contracting by 10,000sq m in 2020, the CBRE research shows.
In fact, there was higher prime real estate absorption in 2021 than the years leading up to the pandemic, CBRE found. Around 75 percent of BNZ’s commercial portfolio are premium grade buildings, he says.
3. A focus on sustainability
Bennett says BNZ is noticing a strong trend towards tenants and investors looking for more sustainable property, particularly buildings that are Green Star rated. By their very nature these are high quality builds.
New green buildings also carry the least risk from a finance perspective, he says. Sometimes a new build incorporating green building principles makes more sense than a retrofit, Bennett says, and this can be a more attractive proposition for the bank.
One of the simplest ways for a company to move on its environmental, social and governance goals is to rent space in a green building, he says.
Take BNZ’s own planned new headquarters for its 1500 Wellington staff. The building is designed to achieve a New Zealand Green Building Council, 5 Green Star rating and is considered one of the most seismically advanced developments in the country, he says.
Spanning a full city block on Whitmore Street, it is due to be finished early next year, when it will be fully leased by the bank.
4. Reducing construction waste
The next few years will also see a big push to reduce the massive amounts of waste coming from the building industry. Construction and demolition waste makes up 40-50 percent of New Zealand’s total waste going to landfill, according to government and council documents. Kāinga Ora has announced a target of diverting 80% of waste from landfill in its large development projects, including reusing or recycling building materials.
Bennett says this will be a trend in the commercial sector too, with developers, investors, owners and tenants looking for increasing use of recycling and other sustainable practices.
BNZ recently funded a 130 townhouse development on old industrial land in Auckland, which had a concrete and steel building on the site. The concrete was crushed and used in foundations and steel was reclaimed and recycled.
5. Bringing staff back to the office
Another trend is companies looking for high specification builds that will attract remote or hybrid workers back to the office, Bennett says.
Real estate agencies are reporting companies making greater use of technology to cater for employees working partly or fully from home. But they are also looking for an office that feels more like home, to bring staff back in. Old-fashioned cafeterias and ageing toilet facilities just won’t cut it any more.
Sleep rooms and break-out rooms are in demand, hot desks and bookable meeting rooms are a must. Post-Covid lockdowns, some premises also have a smaller footprint.
“It all winds back to how do you get people back in the office and how do you attract people?” he says. “What is it, other than the collegial feel, that will get people to want to come in?”
One factor might be the cost of working from home. In the UK, where power prices have skyrocketed, workers are increasingly eager to return to the office rather than face a massive home electricity bill, he says. And while NZ prices haven’t gone up as much, inflation is biting in New Zealand too.
6. Caution in inflationary times
Real estate is often seen as a good hedge against inflation, because of the opportunity to get higher income through increasing rents. But Bennett has a cautious reminder for anyone seeking a hands-off, set-and-forget investment in the commercial market.
“It’s not passive. You need to understand the market and the fundamentals of managing a building.”
Industrial property might be an easier market, Bennett says. “History has shown that in times of change, industrial property always holds up well and there’s less volatility.”
In addition, the fact many areas haven’t seen the necessary infrastructure investment to support new development means the industrial property sector is running hot right now, with significant demand, he says.
7. Changes affecting banks too
Sometimes dramatic shifts in the way people work has seen the commercial property sector facing significant change, Bennett says. In the same way, banks must adapt to conditions for commercial real estate players, including looking at their lending rules.
He doesn’t think the fundamentals, such as loan-to-value ratios and interest cover ratios will go, but banks will be looking for a way through the challenges their customers are facing, he says.
“Banks will need to consider all these additional metrics when it comes to structuring their transactions, including the length of the loan term, and the residual value - the value of a property at the expiry of the loan term.”
For commercial property owners, one solution could be reducing the loan-to-value ratio during a period of increasing interest rates. For developers facing rising costs and longer wait times, it could mean a reduction in the loan-to-cost ratio. Or there might be an option of accepting a lower interest rate where there is lower operational expenditure, such as in a green building.
It’s all about rolling with the market cycle, he says.
“We want our customers to know we’re there for them. We’re not always going to respond to challenges in the same way, but we’ll be there as the market changes and our solutions may change accordingly.”
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