Commercial property is often seen a practical barometer for the state of the economy. We asked Wellington expert Rohan Hill for his view on the next 12 months. 

What a tumultuous roller coaster ride it was during the final couple of months of 2008. Two notable events impacted on the commercial and industrial (C & I ) property sector in Wellington. I say two, because the global meltdown had its roots as far back as the second and third quarters of the year, and by November/December we were more dealing with the fallout rather than the implosion. 

So for C & I, our two biggest events at the end of ’08 were the election of a new Government – complete with a new set of focuses and drivers and a willingness to react swiftly to the recession – and the slashing of the OCR by 150 base points.

There was certainly a slow down in the Wellington commercial and industrial property sector as soon as the election date was announced. That’s consistent with what I’ve seen over the past eight general elections involved in C & I property here in Wellington. Senior civil servants aren’t sure if they’ll be around in a year, which results in a reluctance to take a long term position on office space (and other things). 

However, while we typically experience this period of procrastination around elections, 2008 was different – due to the double whammy from the global meltdown. With National placing a cap on Government expansion, for the Wellington commercial property market, this may lead to a flattening off of activity during 2009 and a slowing in the spillover benefits to the wider Wellington community.

When Reserve Bank governor Alan Bollard took an axe to the OCR in a move specifically targeted at keeping a frail economy’s head above water, the subsequent lowering in bank lending rates, albeit not as aggressive as the Reserve Bank’s  OCR reductions,  was definitely good news for anyone with bank credit.

Countering that though was the continued tightening of lending criteria for smaller C& I customers – say in the $500,000 – $3million property bracket. Not such good news for investors looking to take advantage of bargains in a quiet trading period, and ultimately leading to the removal of a certain buyer category.

Notwithstanding these prevailing market conditions we know that there is a substantial number of investors building up sizeable cash reserves – and with no chance of gaining the eight per cent-plus returns purely from bank deposits, and the share market effectively stifled for at least most of this year and forecasts of dented confidence impacting on any significant rally during 2009– long term commercial and industrial property investment is again looking a more attractive place to have your cash.

‘When?’ will be the biggest question. It will be a matter of timing, and picking when the market – and the recession – is going to turn upward. One of our favourite expressions at Bayleys in the current climate is;”No one is going to ring the bell when the market has reached the bottom”

Looking ahead then, we’re picking that the next 12 months will be tough for some areas of commercial and industrial property. In particular the retail sector with respects to the leasing market and predominantly in the sale of second and third tier quality properties in the investment markets. While there will be some sharply priced deals available, seasoned investors will be waiting for the right ‘fruit’ to come up, rather than simply rushing in to snap up a ‘bargain’ forced onto the market by a vendor’s financial situation. That could well lead to continued depressed prices in the lower quality markets. And for novice investors we’re forecasting they’ll be keeping their money in the bank for the meantime or paying off their domestic mortgages.

With the economy in recession until at least the middle of the year, many small businesses are factoring in staff downsizing – if they haven’t already. While it could be propositioned that those businesses should therefore be looking at moving into smaller premises – and therefore ensuring a turnover of property for real estate companies – savvy’ landlords see the proverbial ‘writing on the wall’ loud and clear and are focussed on retaining existing tenants in place. After all, it’s better to have part of something than all of nothing in these uncertain times.

In the larger corporate and Government segments – typically CBD and tower office market space – the market is fairly steady. While, in the case of corporates, there has already been considerable staff downsizing, moving is a substantial outlay, and any short term cost savings obtained from new premises square-metre rental rates are largely offset by relocation expenses. Similarly with Government agencies – which are usually extremely loyal clients and tend to have longer term leases set in place, lease rates tend to reflect that guarantee of income for the landlord and generally are 10-20% below the top rates in town.

So we will see a thinning out of C & I ‘players’, with many forced to exit the markets. However – and it is important to remember that some of the richest American families and dynasties made their fortunes during, and coming out of, the great depression of the 1930s – there will be astute investors who can’t wait to increase their commercial and industrial property asset base in the coming months.

Whichever way the sector pans out, it will be an absolutely fascinating year to be part of.

Rohan Hill is C & I Managing Director at Bayleys Wellington.