Commercial property values are driven by income, the certainty of that income, and the cost of the money used to hold the asset. Understanding how those three interact explains most of what happens through a cycle.
Yield, income and value
Commercial property is valued by capitalising income. Yield is annual net income divided by value, so for a given income, a lower yield means a higher value.
Yields move with interest rates and with perceived risk. When borrowing costs rise, investors require a higher yield, which reduces value even where the rent has not changed. That is the mechanism behind most commercial value movement, and it operates independently of how the tenant is trading.
The Reserve Bank’s Official Cash Rate influences this through its effect on funding costs, though commercial property is priced off longer-term rates and expectations rather than the OCR directly.
Tenant covenant is the other half
Two identical buildings with identical rent are worth different amounts if one has a national tenant on a ten-year lease with a corporate guarantee and the other has a local operator on two years with no security.
What drives value on the income side:
- Weighted average lease term — how long the income is contracted for.
- Tenant financial strength and any guarantee.
- Rent review mechanism — fixed increases, CPI-linked or market, and whether a ratchet applies.
- Whether outgoings are recoverable, which determines net versus gross income.
- Re-letting risk — how many businesses could use this building if the tenant left.
The segments diverge
Industrial has been supported by scarce serviced land near the transport network and by demand from logistics and distribution. The risk is a purpose-specific building in a fringe location with a thin tenant pool.
Office has bifurcated. Better-quality, well-located buildings with good services lease; older stock with poor services and no seismic upgrade struggles. Hybrid working reduced total space requirements and raised expectations of the space retained.
Retail depends heavily on format and location, with categories exposed to online competition under structural pressure and experience-led formats holding up better.
Seismic is a value driver, not a technicality
A building below 67 percent of New Building Standard faces reduced tenant demand, harder insurance and constrained lending — even though the statutory earthquake-prone threshold is 34 percent.
That 67 percent figure has no statutory status. It became a market threshold because engineering guidance treated it as the point below which risk to occupants is materially elevated, and institutional tenants, insurers and lenders adopted it.
Check the rating, the assessment type and date, and any council notice. An initial seismic assessment is a coarse screening; a detailed assessment can move the number in either direction.
What buyers should verify
- The lease itself, not the summary — term, renewals, review mechanism, outgoings recovery, assignment provisions.
- Tenant covenant, through financial information or a credit report.
- Seismic position and any strengthening cost.
- Building warrant of fitness and the compliance schedule.
- Zoning and overlays, and what else could be done with the site.
- Natural hazards — flooding and instability, which affect insurability as much as consentability.
- Contamination on former industrial or horticultural land.
Financing
Lenders assess commercial property on tenant covenant, lease term, loan-to-value ratio and serviceability stress-tested above current rates. Watch the covenants in the facility, and monitor them rather than discovering a breach at balance date.
Establish financing appetite before committing. A property that cannot be financed on acceptable terms is worth less to you, and will be worth less to your eventual buyer for the same reason.
Stats NZ publishes building consent and construction data, the Reserve Bank publishes interest rate and lending data, and Property Council New Zealand publishes sector research.
General information only, not investment advice.
