Chapter 3
Market Outlook
CBRE New Zealand Real Estate Market Outlook 2025
10 Minute Read
Looking for a PDF of this content?
In 2025 yield movements will contribute positively to investment returns. The lack of rental growth in 2024 limited capital and income-based returns, however, as observed in precedent cycles, a slowdown in rental growth is a key precursor to the recovery cycle. By 2026, both rents and yields will contribute positively to capital returns, and total returns are forecast to reach double digits.
Supply has generally peaked, or will peak in the next year
Most markets have experienced 2024 supply volumes that were well above historic annual averages. The size of the Auckland CBD office market increased by 1.7% compared to the post GFC average of 0.6% pa, Wellington CBD office was 1.8% vs -0.1 (as the market shrunk in the aftermath of the earthquakes in 2012 and 2016). The Auckland industrial market experienced its biggest supply in more than 15 years during 2024, with stock increasing by 2.3%.
In most markets the supply cycle is moderating over the next few years. Industrial supply will run at only about 1.2% of total stock in each of 2025 and 2026. 2025 remains busy in the Auckland office market but beyond this the active supply pipeline diminishes. Wellington’s office supply pipeline is also winding down.
Christchurch is the main outlier. The city has proven itself a strong office occupier market, its demand led vacancy improvements across all submarkets in recent years outperforming the other major centres in New Zealand. Given this environment, the market’s focus has shifted towards the next round of new supply to cater for emerging demand. 25,000sqm of new and refurbished office space was delivered in 2024, with another 14,000sqm expected in 2025/2026.
Retail continues to look favourable relative to past supply trends. The active Auckland supply pipeline is concentrated in 2025 with the completion of the 34,000sqm IKEA store in Sylvia Park and the 18,000sqm Maki Centre in Westgate.
In most markets the supply cycle is moderating over the next few years. Industrial supply will run at only about 1.2% of total stock in each of 2025 and 2026. 2025 remains busy in the Auckland office market but beyond this the active supply pipeline diminishes. Wellington’s office supply pipeline is also winding down.
Christchurch is the main outlier. The city has proven itself a strong office occupier market, its demand led vacancy improvements across all submarkets in recent years outperforming the other major centres in New Zealand. Given this environment, the market’s focus has shifted towards the next round of new supply to cater for emerging demand. 25,000sqm of new and refurbished office space was delivered in 2024, with another 14,000sqm expected in 2025/2026.
Retail continues to look favourable relative to past supply trends. The active Auckland supply pipeline is concentrated in 2025 with the completion of the 34,000sqm IKEA store in Sylvia Park and the 18,000sqm Maki Centre in Westgate.
In an environment of modest demand growth, supply will largely determine sectoral vacancies in 2025
Industrial vacancy in our major markets is some of the lowest globally. In terms of direction, vacancy has trended up in Auckland over the past year due to a cyclical moderation of demand coupled with a strong supply pipeline, although the market remains tight with only 1.6% vacancy. Similarly, industrial vacancy in Christchurch is just 1.7% but expected to rise moderately through 2025.
Christchurch office vacancy jumped over the course of 2024 to 7.1% and 8.7% respectively for secondary and prime grade, although the market holds a better position relative to Auckland. In Auckland, office vacancy continues to rise across the grades with moderation forecasted for prime stock while vacancy in secondary stock continues to rise. The narrative is similar in Wellington, with prime vacancy holding at 6% but secondary vacancy up at 19% and increasing into 2025.
Auckland retail vacancy has declined for three of the five centre typologies we monitored in 2024. Vacancy is concentrated in a handful of centres, mainly subregional centres, which are under significant competitive pressure in their catchments.
While improving, the economic backdrop in 2025 is not expected to drive a significant pick up in absorption. Coupled with expected supply, this will result in a general upward vacancy trend in 2025, although we forecast occupancy to improve in prime sectors less affected by new supply.
Christchurch office vacancy jumped over the course of 2024 to 7.1% and 8.7% respectively for secondary and prime grade, although the market holds a better position relative to Auckland. In Auckland, office vacancy continues to rise across the grades with moderation forecasted for prime stock while vacancy in secondary stock continues to rise. The narrative is similar in Wellington, with prime vacancy holding at 6% but secondary vacancy up at 19% and increasing into 2025.
Auckland retail vacancy has declined for three of the five centre typologies we monitored in 2024. Vacancy is concentrated in a handful of centres, mainly subregional centres, which are under significant competitive pressure in their catchments.
While improving, the economic backdrop in 2025 is not expected to drive a significant pick up in absorption. Coupled with expected supply, this will result in a general upward vacancy trend in 2025, although we forecast occupancy to improve in prime sectors less affected by new supply.
Cyclical moderation in rent growth this year positive momentum by 2026
The Prime market sectors have seen mixed rental growth over the past two years, with the decline in Wellington office and Auckland industrial effective rents observed over 2024 continuing into 2025. On the positive end of the spectrum, we forecast modest growth for retail centres and Prime Auckland office.
The evolving supply and demand environment in 2025 places rents on a more divergent path. While face rents are forecast to remain positive, a more competitive leasing market will result in higher incentives and lower net effective rents in the Auckland industrial market. We forecast that the Prime office sector in Auckland and Christchurch will continue to post modest net effective rent growth but the increasingly competitive leasing market in Wellington, combined with rising outgoings in a market where gross leases still feature, will translate into decreasing net effective rents this year.
In most markets, the improving economic and demand backdrop, coupled with lower supply in 2026, is reflected in strengthening rent growth.
The evolving supply and demand environment in 2025 places rents on a more divergent path. While face rents are forecast to remain positive, a more competitive leasing market will result in higher incentives and lower net effective rents in the Auckland industrial market. We forecast that the Prime office sector in Auckland and Christchurch will continue to post modest net effective rent growth but the increasingly competitive leasing market in Wellington, combined with rising outgoings in a market where gross leases still feature, will translate into decreasing net effective rents this year.
In most markets, the improving economic and demand backdrop, coupled with lower supply in 2026, is reflected in strengthening rent growth.
Cap rates starting to unwind
The 125 bps OCR cut during the RBNZ’s policy reviews between August and November and its apparent commitment to further easing monetary conditions has refocused buyers to a more transactional mindset. While this shift was already evident in Q3 last year via improving sentiment, in Q4 it has further manifested itself in increased levels of bidding and transaction activity. These indicate firmer pricing at the smaller asset size/value end of the market, especially for good quality industrial buildings tenanted on favourable lease terms.
As a result, we have moved the lower end of the industrial yield range from 5.10% to 4.90% in Q4, with the indicative yield shifting from 5.71% to 5.62%. Liquidity and pricing remain more challenging for larger sized industrial assets in the realm of institutional investors. We have also firmed yields in retail (for LFR) and office (in A-Grade CBD), but these reflect asset specific considerations rather than broader market trends. Nonetheless, favourable yield adjustments due to improved asset occupancy and market positioning bode well for wider market improvements as 2025 unfolds.
The RBNZ’s February monetary policy review not only delivered another 50bps reduction to the cash rate but, in contrast to some other central banks, also signalled ongoing commitment to lowering short term interest rates.
As a result, we have moved the lower end of the industrial yield range from 5.10% to 4.90% in Q4, with the indicative yield shifting from 5.71% to 5.62%. Liquidity and pricing remain more challenging for larger sized industrial assets in the realm of institutional investors. We have also firmed yields in retail (for LFR) and office (in A-Grade CBD), but these reflect asset specific considerations rather than broader market trends. Nonetheless, favourable yield adjustments due to improved asset occupancy and market positioning bode well for wider market improvements as 2025 unfolds.
The RBNZ’s February monetary policy review not only delivered another 50bps reduction to the cash rate but, in contrast to some other central banks, also signalled ongoing commitment to lowering short term interest rates.
Interest rate falls provide a platform for modest cap rate compression with margins stabilising around longer term averages
During the past two years, interest rate rises have not translated to a one-for-one yield increase. Instead, margins compressed back towards pre-GFC norms. So, how will the outlook for interest over the next year translate to property yields? Will falling interest rates translate to falling yields, or will this be a chance for the market to rebuild yield to interest rate margins closer to post-GFC norms, implying limited yield movement?
Margins have already improved significantly. We forecast yields firming moderately in 2025 as investor confidence and liquidity lifts and interest rate falls are entrenched. This scenario leads to average (across office, industrial, and retail centres) Prime yields falling from their cyclical peak of 6.85% in mid-2024 to 6.50% in December 2025. It also implies yield to two-year swap rate margins stabilising at c300 bps, higher than the pre-GFC average but materially below post-GFC.
Margins have already improved significantly. We forecast yields firming moderately in 2025 as investor confidence and liquidity lifts and interest rate falls are entrenched. This scenario leads to average (across office, industrial, and retail centres) Prime yields falling from their cyclical peak of 6.85% in mid-2024 to 6.50% in December 2025. It also implies yield to two-year swap rate margins stabilising at c300 bps, higher than the pre-GFC average but materially below post-GFC.
Investment returns restore to healthier levels in ’25-’26
Total returns weakened from 3.6% in 2023 to 3.1% in 2024, largely due to weaker rent growth. In 2025, yield movements are expected to contribute positively to total returns after three years of negative contribution. From 2026 onwards, yield contribution will still be positive but not as strong as in 2025.
After some net effective rent drops in 2024, rents in 2025 will be largely stable, although some sectors will still have a minor rent drop. In 2026, rent growth will start recovering and will contribute positively to total returns.
In summary, in 2025, yields will contribute positively to capital returns, and by 2026 both rents and yield will drive total returns to around 12%.
After some net effective rent drops in 2024, rents in 2025 will be largely stable, although some sectors will still have a minor rent drop. In 2026, rent growth will start recovering and will contribute positively to total returns.
In summary, in 2025, yields will contribute positively to capital returns, and by 2026 both rents and yield will drive total returns to around 12%.