Industrial is not residential

Periodically there are aspects of the world which appear to be commonly accepted as truths, but on sober reflection just don't seem right. We recall some years prior to the GFC writing about so-called "low - doc" loans in the USA.

We pondered how lending with no deposit on overvalued homes to people with no assets could be rational. Of course time proved that it was rational for the New York banker who packaged such a deal as a gilt edged security and on sold it.

Similarly when we do the maths now, to build in East Tamaki and get an 8% return, warehouse space has to be leased for $120m2, and office at $225m2 plus. When that is compared to significantly lower rentals on existing "A" grade buildings, and the often $80m2 that secondary buildings command, it either doesn't make sense to build, or it doesn't make sense that rentals for existing properties should be so low. But that is the beauty of the competitive and (relatively) free market. If owners want tenants badly enough then they will reduce rents and increase incentives so that they bear no relationship to the cost of replacement of the building. And that is what we love about the self-governing nature of the market.

But from time to time there are aspects of that market which become unbalanced unless someone draws attention to it. Currently there are two aspects of the market which to us seem unbalanced.

Industrial is not residential

The media we recognise have limited resources to pursue stories which need insight and research and analysis so often they just pick the low hanging fruit. The residential property market may well be "overheated" in some geographical areas. But try telling that to a vendor in Tokoroa or Westport or Taumarunui. Even Papakura and Manurewa could not be classed as "overheated" in a Herne Bay or Westmere sense.
And just as the media are slow to analyse where the action is, and is not, in residential, they are almost never highlight that commercial real estate is a totally different market, and that within that market exist a number of very different sectors, with different motivators, and different end results.

That is not a major problem except in that it deludes many small inventors into thinking that there is massive value growth in industrial and commercial real estate.
The reality Is that the numbers are the numbers. There may be anomalies when owner - occupier or even investors buy for strategic or even emotional reasons. But generally either return, or utility, will dictate price.

It is mildly time wasting when vendors believe the price they have named is realistic, when clearly it is not. Putting aside the opportunistic ( and good luck to them) what is very irritating is when supposed professionals in the industry endorse vendors opinions, merely to get a listing, with absolutely no evidence that the price is in the same galaxy as reality. Simply to get a listing! And then of course cannot sell or lease at that price, and the vendor is acutely disappointed.That is the type of behaviour which reflects badly on the whole industry.

All Warehouses are not the same

Some 7 or 8 years ago we found ourselves in the position where a low stud warehouse down a right of way, with toilet facilities reminiscent of a third world country , was leasing for much the same price as a street front "A" grade building. Then for a  time some sanity returned, and we saw a decent differential between quality of properties.

However we now see signs that the gap between quality and rubbish is narrowing. One of the problems in the industry is that there are numbers of small investors with one or two properties who don't get out and see the vast differences in quality , and therefore utility  that exists. Often they earnestly believe their old tin shed to be worth much the same as a new high stud tilt slab facility.

So what is the point of this?
That vendors have unrealistic expectations? That's always the case!

We believe that the professionals in the field have the responsibility to not just take instruction from clients, but to assist them in their understanding.
We don't expect the patient to go to a surgeon and instruct him on what to cut out and how to do it. We pay them for their professional expertise and expect them to listen.

Should it not be the same when clients go to a real estate professional?