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High interest rates reshape commercial property: who could be the biggest investment winner in 2025 as rate cuts provide a boost?
In 2024, New Zealand’s commercial property market experienced its most challenging year in twenty years. The pressure of high interest rates, widespread remote working and changing consumer behaviour pushed the market into a slump.
2024: commercial property’s ‘darkest hour’
In 2024, New Zealand’s commercial property market experienced its most challenging year in twenty years. The pressure of high interest rates, widespread remote working and changing consumer behaviour pushed the market into a slump. Data shows that total sales and leasing transactions for the year amounted to less than NZ$6,000,000,000, the lowest level in a decade, while investment transaction volumes fell back to 2001–2002 levels. Ryan Johnson, Bayleys’ national director of commercial and capital markets, described the situation: ‘Investment sales in 2024 were unbelievably poor. The combined effects of the cost-of-living crisis and high interest rates made it difficult for businesses and investors to keep going.’ However, high interest rates were not the only reason for the downturn. Post-pandemic behavioural changes, such as the rapid growth of hybrid working and online shopping, significantly altered the pattern of demand for commercial property.
Diverging market performance
Office property: the flight to quality deepens the divide Hybrid working has become mainstream. Statistics show that nearly 50% of New Zealanders have the option of working from home, with profound implications for the office property market. More businesses favour high-quality office space with modern facilities and sustainable design, while vacancy rates in secondary office buildings continue to climb and rental growth remains weak. This ‘flight to quality’ has created a clear divide in the market. Bayleys’ data indicates that overall leasing demand remains below expectations despite the government’s push for public servants to return to the office. In 2025, the office market’s recovery may depend more heavily on intense competition among high-quality office spaces. Retail property: a mainstay struggling to survive Retail property has become one of the most challenging sectors in the current downturn. High inflation and interest rates continue to weigh on consumer confidence, while remote working has sharply reduced CBD foot traffic, further undermining retail demand. Auckland CBD’s retail vacancy rate peaked at 14% at the end of 2021. Although it has since improved, it remains as high as 10%, well above the pre-pandemic average of 4%. Retail space in residential neighbourhoods has proved more resilient than CBD retail. As consumer behaviour becomes more locally focused, more people are choosing to spend at shopping centres and restaurants near home, breathing life into some retail properties. However, how CBD retail can recover from the crisis remains an open question. Industrial property: a winner bucking the downturn Industrial property was undoubtedly a bright spot in the commercial property market in 2024. Surging e-commerce demand fuelled a boom in leasing and investment in logistics and warehousing facilities. Meanwhile, limited land supply and high development costs sent industrial rents soaring, with cumulative growth of 30% since the pandemic. Industrial property became a sought-after ‘safe haven’ for investors, with stable returns and low vacancy rates setting it apart during the downturn.
Looking ahead: the first signs of recovery
Interest rate cuts: a substantial boost to market confidence Market confidence is gradually recovering as the Reserve Bank of New Zealand begins cutting interest rates. A Colliers survey shows that commercial property investor confidence had moved from negative to positive territory by the end of 2024. Interest rates are expected to stabilise at 5%–5.5% in 2025, supporting a modest market recovery. Structural adjustment and new opportunities Although falling interest rates will drive an overall recovery, structural adjustments in commercial property will continue to have an impact:- Industrial property will continue to thrive on demand from e-commerce.
- The office market will see more intense competition for quality space, while lower-grade office buildings will need refurbishment and upgrades to find a new lease of life.
- The retail market will need further innovation. Retail properties in CBD areas, in particular, may need to become community service centres or mixed-use properties.
Challenges amid the opportunities in 2025
That raises the question: after this darkest hour, could 2025 bring a new dawn for commercial property? YIJU New Zealand once again spoke with senior Bayleys agent Hong Liang, who has 16 years of experience in commercial property. Hong Liang: New Zealand’s commercial property market certainly experienced an unprecedented downturn in 2024, but the outlook for 2025 is already showing signs of hope. From industrial property’s strong performance to potential opportunities for retail transformation and the office market’s flight to quality, every sector is generating new opportunities amid the challenges. For investors, the key is to read market trends accurately, select asset types with long-term potential, and actively adapt to changes in behaviour and the economic environment. Although the future of commercial property is full of unknowns, only the adaptable will survive. Investors and developers who can quickly adjust their strategies and capture emerging demand will be the ultimate winners.