You know how I said last month 514 Central apartments for rent was low... well now we are at 327! This is the lowest in 15 years. To put this in perspective last time the number of rental apartments was under 400 was in 2015 when we were in the middle of an immigration boom.

Rents have gone up quicker and higher than expected.

Now 2023 was the year I saw our CBD coming back with rental levels recovering close to previous highs, a sales value partial recovery lagging with a major increase in value not occurring until Auckland property sentiment returns, hopefully after the election.

And that is not this ! Rents are already above Pre COVID levels by an estimated 10% and we are only 2 months into 2023. It has got me very excited yes, but also surprised. This was supposed to take most of the year, and I didn't actually expect rents to go higher than pre-COVID levels for a while yet. After all rent in the whole of Auckland went up less than 4% in 2022.

Of course, this is great for future values but only if this current demand is permanent and not just a spike.

So, have rental levels recovered? Is this demand here to stay?

I wish I could accept this extra demand but when something surprises me, I have to look further and after much analysis, there is a lot more going on than we think. Here is the rundown.

Floods and Gabrielle

This has put extra heat on the housing rental market but the Apartment rental market, not as much as one might think. I have been speaking to all the rental agents and they are only seeing desperate renters from the floods in the suburbs not the city and mostly for houses. Why? First, there's size. Apartments are often much smaller than the average house, especially in the CBD which are smaller again. Most are studios or small one or two bedrooms with parking more than one car very difficult and pets rarely allowed. So apart from the larger apartments in the leafy suburbs, I don't see Gabrielle and the flooding being the major driving force behind the rising central apartment rents. On top of this rents started rising in early Jan when the students started to come back which was well before the floods came.

Drop in rental supply from complexes being remediated. (leaky) 

Nobody is talking about this, but 5 very large apartment complexes are vacant and wrapped up in plastic right now. This is the largest wave of leaky apartments seen at one time. A total of 686 apartments are not able to be rented - Victopia (193 apts), Imperial Gardens (275 apts), Cintra (123 apts) and Century on Anzac (95 apts). Unfortunately, there are always one or two buildings wrapped up so it is something the rental market is always dealing with, however, right now it is abnormally high. With generally up to 10% of a building's rental apartments being available I would estimate this to be responsible for around 60 fewer rental apartments currently. This and other buildings coming is definitely something that needs to be taken into account when looking at future rental levels.

Social Housing

Housing NZ and numerous social housing organizations over the last three years have purchased and leased a large number of Auckland Apartments. It was a perfect time with everyone leaving. Easy picking. Paying above-market rents and offering tax incentives with rolling-over tenancies have resulted in these apartments effectively being taken out of the rental pool. I would estimate 500 fewer apartments for rent, and it could be more. This is an issue that is likely to get worse due to the current social housing shortage as they are looking for more. A definite long-term contributor to today's current situation that wasn't here to the same extent pre-COVID.

Three years of rental houses/ apartments selling to owner-occupiers.

Ponsonby/Grey Lynn used to be a lower demographic area, full of rental properties. Over time this has changed with more wealthy owner-occupiers moving in, and in turn increasing values. The suburb still has rental properties yet due to values now being so high when they come to market, they sell to owner-occupiers, rarely investors and so reducing rental stock. Now I used Ponsonby as an example, but this has happened hundreds of times over in all the central suburbs over the last three years pushing more renters to apartments.

This is also happening in the city with rental apartments over 50m2. In 2010 approximately 80% of all apartments were rentals and so mostly sold to investors. The average house was around $500k back then yet with it now being at 1.1 million and an apartment the cost of what that house used to be, so many are now selling to owner occupiers and being taken out of the rental pool. Over the last three years, this has gone unnoticed with over 1000 apartments over 50m2 selling further reducing the rental supply. This is a long-term trend that will be solved if new apartments in the area are built to replace this lost stock. This is not coming anytime soon.

Out of the rental pool and into Airbnb

This is a worldwide problem and the reason why Airbnb is often heavily restricted around the world. I.e. In New York it is illegal to Airbnb your entire apartment unless you live in it and in Amsterdam, you're restricted to only 30 days a year. Airbnb takes apartments away from being rented and drives up rents. Auckland's number of apartments on Airbnb is still lower than pre-COVID levels. So, while there has been an increase over the last 6 months it is only a supporting factor and not the current reason for the current excess demand.

It will support increasing rents and be a problem of the future. So good for strengthening rents.

What about all the new apartments built and coming?

There was little rental stock built in the Auckland Central area in the last 3 years. Unlike the apartment boom of the early 2000s when nearly all new apartments were built in and around our CBD what is being built today is mostly in the outer suburbs due to cost. And the new apartments coming that will reduce demand? The next 5 years look very bleak. There are very few new complexes being released in the whole of Auckland let alone our CBD and surrounding suburbs. So, this is a big NONE COMING. Due to interest rates, current property sentiment and the cost to build most developers are moving into hibernation for at least the next few years.

This is good news for values as no new supply will drive up rents and prices and keep doing so until high enough to stimulate new development which is much higher than current values.

This is a big market report - Summary.

COVID caused so many renters to leave the Auckland Central area for nearly three years that a steady stream of apartments leaving the rental pool went unnoticed. With everyone returning it is now being realized. There is a shortage and rental figures have adjusted very quickly.

The issue is when there is a major shortage of anything values can spike and due to the causes of this current situation being numerous as well as some temporary, knowing where rental levels will finally settle is next to impossible.

The good news when you look at the drivers causing the increased demand most are long-term. So other than it being peak rental season right now, the floods having some effect, and absent leaky complexes driving up rents I am very confident that rents will settle at or above pre-COVID levels which is much earlier than I had previously predicted.

This is such good news and makes the long-term bounce back of values now not a question but inevitable when overall property sentiment returns. I am one happy man.

The question now and what I will address next month is when will values start to regain some of their lost ground.

Now your apartment. Rents are all over the place and with rental values important for values I have had to email numerous rental agents asking them to lift their marketed rents for newly vacant apartments. The rental market has moved so quickly that so many aren't aware of the new levels. So, if you are curious as to what rents are being achieved in your building right now just reply to this email with your address and I will let you know...plus I enjoy giving good news. And remember I don't do rentals so I'm not trying to get your business.