Re-valuation, refinancing, recession drivers for 2023

“A year of two halves” is how Bayleys’ commercial property leaders view the market forecast for 2023, as the impact of inflation becomes clearer.

Bayleys national director commercial and industrial Ryan Johnson says most in the sector are expecting a quiet, cautious first quarter of the calendar year as the cost-of-debt and inflation picture becomes clearer.

“The three ‘Rs’ with the biggest influence on the market in 2023 will be re-valuation, refinancing, and recession.

“It is accepted by most that 2023 will be a recessionary year and once the evidence of that starts flowing in through February and March, we’ll start to see a dramatic shift in valuations and then refinancing.

“Many vendors are committed to transacting and can’t keep holding off on restructuring their balance sheets,” Johnson says.

While 2022 saw the lowest number of sales since 1991, with wide bid-ask spreads behind a general reluctance to trade, Johnson predicts many vendors will be committed to transacting in 2023, with more certainty around the cost of debt, inflation, and pricing.

“While caution is still the most prevalent mood in the market, there will be good opportunities for investors. There’s still a lot of private equity out there with strong balance sheets looking for the right opportunity,” Johnson says.

Bayleys national director retail Chris Beasleigh says most businesses in that sector are expecting a tough ride through the first part of the year, there is hope of a bounce-back by the last quarter.

“That’s driven by the hope that increased interest rates will be a short, sharp shock before they start coming back down again,” he says.

Bayleys executive director Auckland commercial and industrial Lloyd Budd says the demand for high-end flexible office space is expected to remain high, and that more employers are expecting staff to return to the office.

“Large employers in New Zealand are saying they want and need their teams back in the office in 2023,” Budd says.

Premium building features, green credentials, office floor plans and engagement programmes will be key to that happening, he says.

“But so will economic pressures which may lead to staff ‘right-sizing’ in some organisations and a tightening of the job market in some sectors.”

Bayleys national director hotels, tourism and leisure Wayne Keene says the sector also expects challenges from rising interest rates, particularly in the first quarter.

“This means we are likely to see some businesses come to the market.

“The good news is that in the event of a market correction, there will be strong interest in those sales as more people see the chance to buy a going-concern business and add value for future capital gain.”

While industrial investment paused slightly through 2022, Bayleys national director industrial and logistics Scott Campbell expects it to find its level again over the next six months.

“The intense demand for logistics space that was a feature of pandemic supply management will again be sought after in 2023 as demand for goods and services remains strong,” he says.

“Now we are through the pandemic era, we should see an increase in international investment. That’s initially from the Australians and Singaporeans coming back into the market but softening yields should start to spark more activity.”

Bayleys national director business sales Jason Hyde says confidence in unit-producing cash flow businesses should increase through 2023.

“Particularly in sectors where it's very difficult to replicate the business in areas like manufacturing, infrastructure, or construction.

“The things that might hamper that confidence will be the availability of staff, which comes down to whether or not the government further loosens its policies on immigration, along with increased capital costs and supply chain constraints.”

When it comes to asset management, property investors, owners and occupiers are likely to remain cautious going into 2023, says Bayleys national director building consultancy David Guy.

“As the economic conditions change, we’ve been seeing a lot more tenants instruct us to complete premises condition reports, as they actively seek to reduce their end-of-lease liability and reduce any unwanted expenditure,” Guys says.

“But we are also seeing the same instruction from landlords so they can ensure they are minimising unexpected make-good costs and are set up to quickly capitalise on market opportunities.”

High net-worth investors from offshore and within New Zealand, will be set up to move quickly in acquiring assets when they see an opportunity, probably among high-leveraged assets. "We expect to see a lot of technical due diligence work as they identify those opportunities."

- Article supplied by Bayleys