Commercial real estate in 2025: primed for recovery

- Scott McKenzie, CEO & Director PMG Funds

As we move towards the end of the first quarter of 2025, we are seeing green shoots appear as the economy shows growing signs of life, aligned with our views of a gradual economic recovery which is expected to pick up pace into the second half of this year.

With this context, we have a unique opportunity for strategic investment, at good value, across many sectors. Commercial real estate (CRE) is proving to be among these, with the combination of lower borrowing costs, recalibrating property values, and improving business confidence creating an attractive landscape for investors.

Preparing for growth

As businesses look optimistically to an improving outlook, preparation for new investment, expansion and growth are firmly in strategic plans for the coming years ahead. Many companies have taken steps to strengthen their balance sheets and position themselves for growth as economic prospects improve. The demand for high-quality commercial spaces, particularly those with sustainable features, is expected to increase to meet the needs of proactive businesses who are looking to deliver on growth strategies.

The post-pandemic shift in working habits has stabilised, with most industries finding a balance between remote and in-office work. This has provided greater certainty around space requirements, enabling companies to focus on securing the right environments to support their operations. High-quality, sustainable properties are becoming a priority as businesses align their real estate strategies with broader organisational goals.

Investor sentiment

As the official cash rate continues to reduce to a more neutral territory, likely around 3-3.25%, we expect property valuations to recalibrate. Historically, this phase has signaled a turning point for property values, with early signs of renewed investor interest already emerging. Recent reports indicate that investor activity in New Zealand's commercial real estate market is increasing, particularly in yield-focused and growth-oriented assets.

At the same time, term deposit rates are trending downward, prompting some investors to explore alternative income-generating opportunities. Historically, commercial property funds structured as Portfolio Investment Entities (PIEs) have offered net returns that may be higher than some term deposit rates (subject of course to market conditions and individual fund performance).

For investors exploring commercial property opportunities, market conditions in 2025 may offer favourable conditions compared to previous years, dependent on personal financial objectives and risk appetite.

Strategic positioning for success

At PMG, we have strategically positioned ourselves to take advantage of opportunities as the market transitions into a growth phase. By maintaining stronger balance sheets and adopting relatively conservative loan-to-value ratios, PMG has been able to leverage opportunities presented by the current economic environment. This approach has enabled the successful execution of a number of strategic acquisitions this year.

Notable additions include a newly built four-storey base-isolated (seismically strong) office building on Victoria Street in Wellington, reflecting a long-term commitment to the capital’s commercial real estate market, and a large industrial site in South Auckland, with a lease up repositioning strategy within the next 6-12 months, generating improved value.

These moves underscore the importance of maintaining a clear strategy and leveraging opportunities in a shifting market. As the cycle evolves, businesses and investors alike should focus on building robust strategies that align with their long-term objectives.

Timing is key

There’s a well-known saying that investment success comes from time in the market, not timing the market. However, if ever there were a moment to invest strategically, we believe 2025 may present that opportunity dependent on your personal circumstances.
The next growth phase may present an opportunity for both businesses and individuals to position themselves for success. A proactive and forward-looking approach can help make the most of the upswing. This involves re-evaluating strategies, focusing on high-quality assets, and maintaining a positive outlook despite the challenges of recent years.

The foundation for growth is being laid across the sector, driven by stabilising economic conditions and increasing confidence among businesses and investors. With a strategic focus and the right preparation, we expect the commercial property sector will be poised for recovery and growth in 2025 and beyond.

For more information on PMG and our funds, visit www.pmgfunds.co.nz