Stabilising interest rates, demand green are shoots for the sector

Lower interest rates and stable inflation – after a grim winter, the economic outlook is decidedly rosier for 2025. Consumer confidence is rising, which should lead to wallets being prised open and an upturn in spending. Businesses, too, are feeling more buoyant, with confidence and employment intentions running high. 

All that translates into positive times ahead for the commercial real estate sector.

“Enthusiasm is reappearing across asset classes, and we expect to see this year’s headwinds turn into tailwinds in the new year,” says Scott McKenzie, CEO of PMG Funds. “We’re seeing equity and capital markets already looking forward, and commercial real estate lags behind equity markets, so we’re cautiously optimistic heading into 2025.”

Professional services and large format retail performing relatively well

The cautious part of the optimism is well warranted, because despite improving economic conditions, many companies are still labouring under the weight of the difficult winter period. 

“No bones about it, there are plenty of firms that are finding it tough,” says McKenzie. “The pipeline for many firms has got a bit lighter and the short-term environment is challenging. Some sectors haven’t done as well – small hospitality and strip retailers have been experiencing slower turnover due to the cost of living and lower consumer discretionary spend. And for the logistics industry, fewer goods are being ordered so the volume is not moving around the country as it has in the past.”

Other sectors, however, have found it easier to weather the winter – many professional services, banking, insurance, and large format retail, for instance.

“Customers have moved toward more affordable price points,” says McKenzie. “This means large-format retailers like Kmart and Mitre 10 are still holding their own. In general, higher calibre larger tenants with bigger balance sheets, are still performing well.”

Resilient businesses are ready for the upturn 

Businesses that have withstood the downturn well, along with similarly cashed-up investors, have been consolidating their portfolios and looking for bargains. 

“Companies with strong balance sheets are setting themselves up to grow again, and they’re structuring their businesses to prepare to get even stronger,” says McKenzie. “They are thinking about their growth trajectory over the next few years and moving into high-quality buildings. We focus on having those types of tenants because it helps make our funds and therefore returns to investors more resilient.” 

In the years immediately following the Covid-19 pandemic restrictions, some companies downsized their spaces in response to the working from home trend. By now most industries have reached an equilibrium, giving them more certainty about how much space they need and letting them focus on finding the right space to grow their operations in the years ahead. 

“We haven’t had any office occupiers looking to downscale in recent times because of hybrid working models,” notes McKenzie. “Instead, we’re seeing firms looking for higher-quality spaces with sustainable features, which fit with their strategy moving forwards.”

Investor capital coming off the sidelines

If the Official Cash Rate (OCR) heads into neutral territory, at around 3 to 3.5%, capitalisation rates will calibrate and it’s likely property values will start to rise again, according to McKenzie. Not only are there more inquiries from tenants looking for A-grade properties, but inquiries have also increased on the investor side. 

“Investor capital has been sitting on the sidelines for a while – now investors are beginning to get more active in the market,” says McKenzie. “We are seeing investment activity lift on the back of reduced term deposit rates. And with term deposits on a pathway to continue reducing, investors are increasingly considering their portfolio and allocating more to yield and growth asset classes, including commercial real estate.”

There are also green shoots on the development side, with more strategic acquisitions being made and more feasibility reports being commissioned for developments. 

“Developments take some time to be realised, but they start with the planning and we’re seeing more of that,” says McKenzie. “Once a few major projects are approved and are underway, that will build confidence.”

Get your game plan ready for future success

PMG Funds is positioning itself for a strong future by strategically preparing for growth. With a clear focus on reducing bank gearing in the wake of the pandemic – and with support from wholesale investors – PMG has been able to make strategic acquisitions at very attractive prices this year. In August, PMG acquired a base isolated seismically resilient new four-storey office building on Wellington’s Victoria St, signalling a long-term commitment to the capital’s commercial real estate market. It also recently bought a large tract of industrial land in South Auckland with plans to lease and reposition it within 6-12 months to enhance its value.

As the economic cycle starts its slow revolution into the next growth phase, McKenzie believes that both businesses and individuals can make the most of the upswing. 

“We’re confidence creatures,” he says. “It’s about maintaining a ‘glass half full’ approach, where you use your position and your balance sheet to capitalise on opportunities. Think carefully around your strategy, reframe your game plan, and build the blocks towards success.”

More info: pmgfunds.co.nz

Sources: ANZ Roy Morgan Consumer Confidence; ANZ Business Outlook; (both October)]