Commercial market faces slow recovery
Last updated 10:28 10/04/2011
Christchurch faces the possibility of high office vacancy rates once the rebuilding of the city's commercial centre gathers pace, a study by real estate company CB Richard Ellis (CBRE) has found.
To assess the longer-term impact of February's quake on the city's commercial property market, CBRE director Zoltan Moricz and senior research analyst Craig Wong looked at the effects major earthquakes had on property markets in other cities, particularly Kobe in Japan in 1995 and Los Angeles in 1994.
Their report says the population of Kobe, which is Japan's sixth- largest city, fell by around 100,000 people to 1.42 million after the disaster. It did not recover to pre- quake levels until 2004.
"Businesses were severely impacted. Smaller local businesses without substantial financial backing were most impacted and in some cases never recovered. Many firms also relocated to other cities," the report says.
The impact on the Kobe office market was extensive. Before the earthquake, office vacancy was 8%, but then damaged buildings were taken out of the market so they could be repaired. In addition, a large number of already vacant buildings were taken out of the market as a result of damage.
"Consequently, office vacancy of the remaining stock fell to 5.6% in 1995."
Over the next few years the damaged buildings were repaired or rebuilt and by 1999, Kobe's office stock was back at pre- earthquake levels.
Demand, however had dropped. Most of the tenants that had moved out of the city did not return.
"This resulted in a shortfall of demand relative to supply which was exacerbated by the business failures which followed the earthquake. The result of this was a substantial increase in vacancy to 1999," CBRE's report says.
"It wasn't until 2004 that demand and occupancy improved. This indicates that the earthquake had a 10-year negative impact on the office market, although . . . it is difficult to precisely isolate its impacts in comparison to wider economic forces."
The effects of the 1994 Los Angeles earthquake were not so severe, the report says.
It was centred on the San Fernando Valley, which contained 12% of Los Angeles' office stock.
"The initial impact on commercial property was office relocations to surrounding suburbs in which vacancy rates fell considerably. However, these were largely for short-term leases as businesses were confident of returning to the San Fernando Valley."
Rebuilding was rapid, and by 1995 repaired buildings were being reintroduced to the market.
"This caused an increase in vacancy, from 13.5% to around 14%, as initially they were not fully taken up by occupiers.
"However, positive absorption from 1996 resulted in a steady decline in vacancy."
The report said Christchurch's vacancy rate would be low in the short term as damaged buildings were removed from the available supply, even when allowances were made for businesses which had moved out of the city or failed.
"However, although to some extent dependent on the speed of rebuilding, the experience of both Kobe and Los Angeles indicates that we will likely see an increase in vacancy as buildings are rebuilt/repaired and brought back into supply.
"The Kobe case study also indicates that demand for newly introduced stock could be subdued, taking an extended amount of time until lost occupancy is recouped.
"Based on this, it may take many years for the office market in Christchurch, especially the CBD, to recover to pre-earthquake levels," the report says.
- Sunday Star Times