Post-COVID – ghost cities or mixed-use urban communities? By Lisa Hinton

Six forces are converging in a post-Covid New Zealand that will fundamentally transform our urban centres. Left unchecked, the results of this convergence could be ghost CBDs characterised by untenanted buildings and distressed landlords, and a population still afflicted by the housing affordability crisis hampering our younger generations.

But with development industry foresight, and councils and Government front-footing reform and investment pathways, an alternative could see the rise of building stock repurposed as mixed-use vertical communities, creating new models of sustainable urban living.

Consider these six forces …

1. Recession

Post-Covid, we’re in recession – how deep, no one knows. We’re seeing a precipitous drop-off in demand for commercial office space, with businesses taking smaller tenancies and vacancy rates spiking. Australian banks are forecasting house prices in major cities to fall between 10% and 30% in the next year, and recent reports from ANZ are predicting 5% to 10% falls in New Zealand.

The end of the New Zealand Government’s second wage subsidy in September – which currently supports some 400,000 New Zealand workers – will likely bring with it a wave of redundancies, liquidations and unemployment that could make the GFC look like a training day out. Recessions, unemployment, falling house prices and building vacancy rates all go hand in hand.

2. The drift to A-grade stock

Combine the above with an already noticeable drift into newer, flashier A-grade buildings – for instance, 3200 people in Auckland’s CBD are currently moving into the new billion-dollar, 40-storey PwC tower in Commercial Bay – and areas like Shortland Street are being drained of tenants and life.

In Auckland, pre-Covid vacancy rates in B and C-grade space had already climbed to over 15%. Businesses had begun to ‘trade up’, moving to modern, seismically safe premises – and the same is true of Wellington’s CBD.

3. The uptake of remote working and ‘downsizing’

Now that businesses and staff have experienced remote working at full blast first-hand, they’re continuing with it in various forms. ‘Right-sizing’ structuring is freeing up more office space. Combine this with remote working, and the trend is in downsizing tenancies or moving to smaller, cheaper premises.

Already, Kiwi real estate agents are receiving enquiries about smaller footprints or lease exits. Landlords will now compete for an ever-dwindling tenant pool who want less space and higher quality.

4. Hotel boom left underutilised

From 2017 to 2020, we saw the biggest hotel construction boom in New Zealand’s history. A record number of new hotels were built or repurposed – and now, they don’t have the international tourists to occupy them. In 2019 alone, a $2 billion boom created over 1000 new hotel rooms in Auckland, Wellington, Queenstown and Christchurch. Another 3900 were under construction into 2020, off the back of international visitors soaring to 3.9 million in 2019.

That investment in building stock was built on an international tourism forecast which literally disappeared overnight. But post-lockdown, the issue of empty hotels will truly come to the fore. We don’t expect a return to 2019 tourism levels anytime soon, so we must think about how to repurpose this hotel stock in meaningful ways.

5. Retail moving online

As retail increasingly moves online, big landlords and malls will face resulting pressure. According to a report from financial services provider UBS, online sales are predicted to double, with up to 20% of bricks-and-mortar stores expected to shut for good. Retailers that survive and don’t abandon the clicks-and-mortar combination will likely vacate existing tenancies and look for smaller footprints and cheaper rents.

6. Housing affordability

Nothing alters the reality that house prices have risen over twice as fast as incomes in the past 10 years, and we have a whole generation priced out of the market. And even while interest rates are at record lows, banks are risk-averse and tightening up on credit.

Banks have been spooked by the very high numbers – some 100,000 in New Zealand and 730,000 in Australia – who asked for and received some sort of mortgage holiday as a result of Covid-19. This, combined with rising unemployment, means the banks are more reticent to lend to young people – the very people most likely to be laid off in this environment. Millennials are often the worst affected. They’re also the generation most seeking the amenity, convenience and ‘vibe’ of living in city centres.

UNFORESEEN ISSUES

Taken together, these six forces lead to unforeseen issues in our city centres: people working from home, older B and C-grade building stock left untenanted, and hotels and retail space – old and new – not utilised. At the same time, young people are still left out of the property market and hamstrung by unaffordable rents.

Many buildings in our cities are fine structurally. Yes, they need upgrades – often seismic – but they could easily be repurposed into vertical communities and models such as mixed-use and co-living.

A WAY FORWARD

Mixed-use isn’t new, but it’s relatively new in New Zealand. There was a spate of development around 2015 in Auckland, where older office buildings were repurposed into new residential apartments and snapped up by the market, thanks to benefits such as large floorplates, high ceiling studs, views, car parks, and inner-city amenity. The challenge was in making these developments viable, with structural and seismic strengthening and rezoning costs having to be factored into the development equation.

The trick is to do mixed-use well. And that means a few things:
• Relaxing our planning rules to allow mixed-use business models to operate in one building
• Drawing on co-living models like those from California – international management models like co-living in repurposed city blocks are great solutions for landlords and young people alike
• Investing in urban design and our social and green connectedness – think living walls, green rooftop gardens, shared amenities, and bringing nature into our cities
• Opening our capital markets to allow investment to make this a reality – we don’t have the capital depth in the New Zealand market to do this properly.

GREENING UP

Repurposing old stock is the single most sustainable thing we can do over building new – and sustainability is essential to our growth. Millennials and upcoming generations are seeking green in design, in the economy, and as a way of living. They’ll also pay for it.

This could look like green vertical communities with communal roof gardens, living walls, and the like – but to enable all this, we must in turn enable capital flows for development investment and relax Resource Management Act (RMA) and planning rules to enable easy change of use.

Historically, our capital markets have been relatively shallow. Landlords are often developers, and when their rental incomes are diminished or uncertain, they don’t have the confidence or bank leverage to get capital to invest in development. The net effect is a reduction in development finance and activity in the private sector. Capital is ultimately the key enabler for good urban development. Unlocking it, and paths to it, is critical to reimagining our urban development and getting to better.

We’re positioned on the global stage as a country of choice. Let’s leverage this. Post-Covid, the Overseas Investment Commission (OIC) and the rules in place for foreign capital flows need to be reviewed.

RELAXING OUR PLANNING RULES

The other big enabler is to simplify and relax our planning rules to enable flexibility of modes of use. Local councils would need to allow repurposing and rezoning through simple, streamlined processes that enable different uses of a building, mixing strata titles with commercial and retail leases in models.

There are real challenges in converting older stock, and developers need to be able to buy unlettable buildings at lower or discounted rates to factor in the ‘onion’ effect. This reflects the issues developers encounter when peeling back the layers of an older building and bringing it up to code seismically, structurally, and in line with today’s fire and health and safety regulations.

Big issues such as access, elevator upgrades, and seismic strengthening on old carcasses can be very expensive. But from an asset return perspective (i.e. the building has a use again, sustainability ROI, and generational affordability ROI), the dividends are huge.

WHERE TO NOW?

If we come together as a development community to think up solutions for these issues, encourage the opening of capital flows, and work alongside councils to simplify and streamline planning, we can be more nimble going forward.

And we can create better, greener and more vibrant inner-city urban centres, with vertical mixed-use communities offering a modern, refreshing flavour and vibe to our post-Covid landscape.

Out of every crisis comes opportunity. Let’s build a new future for New Zealand.

FOOTNOTE: This article was written prior to the current outbreak of Covid-19 in Auckland.