Downsizing firms leave space in New Plymouth’s offices

The shrinking business activities of heavy engineering and energy companies across Taranaki has seen office vacancy rates increase markedly in New Plymouth, according to new property research.

Data from real estate agency Bayleys highlights that downsizing by the likes of  local engineering company ITL and New Zealand Energy Corporation has seen fewer staff occupying less desk space in the city.

Bayleys Research national manager Ian Little said the downturn in business confidence and activity followed two years of growth by heavy engineering and energy firms – which had consequently seen the amount of vacant office space decline between 2012 – 2014.

“However, as the energy and engineering companies have reduced staffing levels, the result has been an increase in the number of vacant office premises being brought to market,” Mr Little said.

“The downturn in engineering activity is evident within the industrial sector - with levels of sales and leasing activity down since mid 2014. Adding to that drag on the market is the significant growth in the amount of spare capacity within office buildings.

“This ‘shadow vacancy’ within existing space - in addition to the quantum of totally vacant space - will cap rental levels as new demand arises when the local economy improves. This growth will be largely absorbed within the premises which companies currently occupy.

“The impact of the slowing in the local economy is also illustrated by a dip in construction activity. The number of consents issued for new factories and storage facilities across the Taranaki region fell from 69 in the 2013 calendar year to 43 in the year to March 2015.

“The impact of the downturn in the local economy on the local commercial and industrial property sector will depend on how long low commodity prices persist.”

Mr Little said vacant office space was most evident within New Plymouth’s high-rise towers, and office blocks with low seismic ratings.

“While the cost to strengthen buildings can be high, New Plymouth landlords need to weigh this against the increased likelihood of vacancies, or the need to accept discounted rents in order to attract tenants.”

However, now was the time to upgrade dated premises, he said.

“The business case for committing funds has been strengthened by the low mortgage rates currently on offer around the low five percent range, and the subsequent low deposit rates on offer from the banks.

“Some New Plymouth commercial property investors surveyed calculated they can generate higher returns from increasing rents as a result of modernising premises than they can from simply depositing funds in the bank.”

The growing trend of vacant office space was also being replicated across New Plymouth’s CBD retail sector, said Mr Little.

“As is the case in many town centres, traditional retail businesses in New Plymouth have come under pressure as a result of competition from bulk retail centres and changing shopping trends such as e-commerce,” he said.

“The impact is particularly stark within secondary strip locations such as parts of Devon Street East and also - as with offices - within buildings with low seismic ratings.

“It has become evident that New Plymouth CBD in its existing form is too large. Plans are being considered by the district council to establish the central city as the speciality retail hub for the district and to provide the opportunity for more people to live in the central city.”

Already, a strong sub-sector of New Plymouth retailers were making the move into a more concentrated ‘hub’, Mr Little said.

“Within Devon Street’s prime strip - between Egmont and Gover streets - vacancy rates fell from 7.2 percent in April 2014, down to five percent in April this year,” he said.

“Further out on the city fringe, the bulk retail sector has performed well - with rents having firmed since early 2012, and vacancy rates at low levels.

“There has been a growing disparity between the rents commanded by well-located premises fitted out to a high standard compared to older premises.”

Mr Little said the demand for modern well located premises in precincts such as that surrounding the Len Lye Centre and Puke Ariki had resulted in an increase in demand for shops, restaurants and bars within the area which had, in turn, seen redevelopment and building upgrade activity increasing.

For commercial property investors with holdings in New Plymouth, Mr Little said yields were now generally in the 7.5 to 12 percent bracket depending on the quality of the building.

Recent large sales in the city included:

• The Carters’ building supplies warehouse in Egmont Road which sold for $6.25 million

• The Bunnings Warehouse DIY outlet in Molesworth Street which sold for $5.3 million and

• A showroom/warehouse in Hurlstone Drive – jointly occupied by Chesters Plumbing and Fonterra Brand which sold for $1.19 million.