Commercial Is Better Than Residential? The Great NZ Property Debate with Logan Roach

Logan's Journey Into Commercial

Daniel: Team, welcome back to this week's Blueprint Podcast. We're incredibly excited about our guest this week, aren't we, Rory?

Rory: Absolutely. We're always in conversations with our clients about the different types of property. Obviously, we're bread and butter residential, but when you get to a certain level, the allure of other asset classes starts to kick in, doesn't it?

Daniel: For sure. So, we've been prodded and poked to get someone on the podcast to talk about the commercial space. When it comes to commercial, there's only one bloke. And that is Colliers sales broker, Logan Roach.

Daniel: Honestly, I've known him for a very long time, and he's the most experienced person I've met in the commercial space. He really understands the game, knows what's suitable for which type of clientele. This is the guy to talk to, so I'm extremely pleased to introduce our guest. Logan, mate, thanks so much for coming on.

Logan: Thanks for having me, mate.

Daniel: Legend. So today we're going to have a bit of a chat about your journey. We really want to talk about the commercial real estate space as well, do a bit of a health check, and then we're really going to get into the ins and outs of commercial real estate as an investment and how it actually stacks up to residential. I've got a few thoughts on that, you've got a few thoughts, so we'll break it down. But before we get into that, tell us a bit about how you actually found yourself selling commercial real estate.

Logan: Yeah, so I did the traditional thing where I went to uni. Didn't really know what I wanted to do, probably like a lot of people. Did a Bachelor of Commerce, knew I wanted to get into business, didn't know what that meant. Did a bit of travelling after that, went to America, did a ski season, which was heaps of fun. I was getting paid $10 US an hour, maybe some of it in cash, and I thought I was getting overpaid for what I was doing. That was an awesome experience, met a lot of people.

Logan: So I came back and got a role with a company essentially selling rubbish bins. I was in the waste industry, working for a manufacturer in the waste and rail industry, and my focus was on these solar-powered rubbish bins.

Daniel: Solar-powered?

Logan: Yeah, solar-powered. I'd never heard of it until then either. The idea was that these bins compacted waste, so they were put in areas that had issues with overflowing bins—freedom camping areas, tourist hotspots, and the like. My role was basically to hit the road, meet with waste managers at councils, and sell these bins. They were pretty expensive, about $8,000 to $10,000 a pop, but the angle was that instead of having 10 overflowing bins, you'd have one with 10 times the capacity. It was all off the grid, and there was a platform to monitor how full the bin was and when it needed emptying.

Logan: That was awesome, B2B sales, loved meeting people. But I was in that role for about three years and decided that, if you've ever dealt with council, they're pretty painful to deal with at the best and worst of times. People typically only last two or three years, and you put all this work in, then they leave, and you're back to square one. A lot of it's tenders and grants, so they can only really buy the product if they've got a grant from central government. I found it a bit tedious in the end.

Logan: After that, I thought I was a pretty good salesman and wanted to stay in the industry, so I applied for every different sales role under the sun. I don't even remember applying for it, but I applied for a residential real estate job. She called me up, said let's catch up, and at first I thought, there's no way this is me. But then I met with her and thought, this is actually cool. I liked the idea of working for yourself, being remunerated for the work you put in, uncapped essentially. But selling to mums and dads, I was still a bit younger at the time, and my background was B2B sales, which is essentially what commercial real estate is. Rather than B2C, like residential, which is a lot more emotional—indoor-outdoor flow, which I have no idea about, I'm not an interior designer. So I thought, why not commercial? That's theoretical, based on square metre rates, yields, all that good stuff.

Logan: I met with a bunch of commercial agencies, decided it was definitely me, and was lucky enough to get a job. Six years later, I'm here.

Rory: Wow, what a journey. I think it's about identifying things you're passionate about, like looking at that opportunity between resi and commercial. Coming from a business background, it makes sense to pursue commercial because the buyers and vendors are people you can understand and talk numbers with, whereas residential is a bit more emotional and more of a marketing thing.

Entering the Market During COVID

Daniel: Tell us about your first entry into the market and how things changed, because you went in at such an interesting time, right? You joined just before COVID.

Logan: Yeah, that's right. I experienced both extremes of the market within a period of three years, which is pretty wild. I did a speed run, yeah. I went in a month before COVID, had my first week of meetings, and then we went into lockdown. Nobody really had any idea what was going to happen—it was unprecedented.

Logan: But I flipped it on its head and thought, this is actually perfect. I get to sit at home, get a database, and prospect. Where I work, we're very patch-focused, so you focus on a geographical area and become an expert in that market. My bread and butter is the Eastern Fringe—Panmure, Mt Wellington, Ellerslie, Greenlane, everything eastern-central Auckland. I databased that whole area, just on an Excel spreadsheet, name and number of everybody.

Logan: Once we came out of COVID, I had this whole database. The first week back, I called up a guy, said let's catch up for a coffee, give you a market update. He said, love to catch up, but I'm based in Christchurch. So we did a Zoom, as was normal back then. He said, thanks for calling, I have three properties I'm looking to divest—one in West Auckland, one in St Heliers, and one in Rotorua. He said, you'd be doing me a real service if you sold these for me. This was literally my first day after lockdown, hitting the phones. I thought, this is easy! That's how I got my first stock to sell, and those properties all sold on deadline or auction date, which was magic.

Logan: So at that period, 2020 into 2021, it was really just about getting the stock. As long as vendors weren't unrealistic, deals happened—even some unrealistic ones got results because of the crazy market. Then, 2022 onwards, interest rates rose and the market shifted quickly. We went from a market where investments and vacant property were both transacting well, to one where, from 2022 to 2024, most transactions were vacant properties to owner-occupiers. The major driver was the ability to get finance—if you had a good business and wanted to buy a retail, office, or industrial building, you could actually lend up to 100% of that acquisition.

Rory: Wow.

Logan: There were investment transactions, but for them to make sense, yields needed to be 7-8% plus, and there just wasn't a lot of that transacting. Most investors were just holding on unless they got premium pricing.

Daniel: Those 7-8% yields, was that specific to the COVID period, or has that historically been what commercial investors expect?

Logan: Yields are always a reflection of interest rates. Most investors look at property and go, if I'm getting lending at 5-6%, I want a yield around that mark to cover my costs. Typically with commercial, it's a 40% deposit. We did see transactions with 8-9% yields, but they were typically inferior, B- or C-grade office buildings with lots of vacancy. In that 2022-23 period, most investors were just holding on unless they got premium pricing.

Commercial Versus Residential Investment

Daniel: If we talk about market factors, we always talk about residential—interest rates are the biggest driver of cost of borrowing. But you also get this underlying market where things change, people need to move on. A big driver of first home buyers is that they're going to transact regardless. Comparing to residential, which do you think is more impacted by interest rates?

Logan: That's a great question. I think commercial buyers probably are, because it's less emotional—it's just numbers. The biggest challenge we have with commercial is people go, why would I buy at a 5% yield when I can get a term deposit at that rate, which is low risk? But with commercial, there are so many things you can rejig to add value—tidying up leases, rent reviews to increase income, and capital gain as well, which a lot of people looking at term deposits forget.

Logan: So I'd say commercial is less emotional, and the negotiation is very black and white. If you tell a purchaser the price indication, you get a quick gauge if they'll put in an offer or not. With residential, it's a lot more emotional—school zones, partners stretching budgets, etc.

Rory: Are the banks still lending 100% for businesses, or is that shifting now?

Logan: Yep, it's still happening, but typically only for the owner-occupier market, and it comes down to cash flow. If they've got good cash flow, they're willing to lend up to 100%. For investments—tenanted property—banks typically require a 40% deposit.

Daniel: 30% for an investment property, right?

Logan: Yes, depending on what you're buying. With some caveats, you can do 10% on some investment if it's a new build, but there are some non-bank lenders who allow 10% for residential at the moment. It's a bit easier to get finance on residential.

Daniel: Commercial sounds pretty sexy, but there are so many layers to it—yields, valuations, financing. We get a handful of commercial deals, but it's not our bread and butter. What I find super interesting is valuations of commercial properties. Renting a commercial lease myself for Blueprint, and talking to many landlords and people like yourself, the way properties are valued can change drastically based on the income.

Daniel: I had this situation where there were heaps of vacancies, and tenants were keen but not at the requested price. Say they want $100,000 plus opex for the lease, and the offer is $80,000. The landlord would rather leave it empty than rent it.

Logan: Yeah, it's interesting, isn't it? Because if you rent it, you're confirming a lower value for your property—you lock in your value.

Rory: Isn't that absurd? Wouldn't you just take that?

Logan: It is, yeah. We see a few interesting things in our industry, and that's probably another thing about commercial property. There's a large chunk of high net worth family trusts who own a lot of property, and they have the ability to stomach that lost income until they get their number. The other thing is, if they give someone a deal at $260 per square metre, how's that going to affect the rest of their tenants? They might have all the other tenants knocking on the door saying, "Hey, they're paying this, why aren't we?" For rents, especially in commercial leasing, it's all based on comparable data. Some landlords have a monopoly on an area, so if they drop the rate, it might negatively impact the rest of their portfolio.

Logan: If it was my one asset and I had a vacancy, I'd do a deal at $80,000, maybe put a market rent review in two years to fix it in, but provide a discount on the front end to incentivise people. In the office leasing space, because there's more vacancy, there are a lot more incentives for tenants—couple of months' free rent, fit-out contributions, that kind of thing.

Daniel: For those of us leveraged up to our eyeballs, we couldn't afford to knock back a tenant. But some people out there, it's not a problem.

Rory: Do you see many mum and dad investors coming through—people who've built up a resi portfolio and now want to diversify?

Logan: Absolutely, and that's picked up a lot in the last six months, especially in my market. My market is sub-$20 million, but the bulk of my transactions are $2-5 million. That sub-$3 million space is very active, and there's a severe lack of stock in the market for that bracket. The buyers are typically mum and dad investors who have a residential property portfolio and want to diversify across asset classes.

Rory: Where's the bulk of your stock in terms of price range?

Logan: Typically $2-4 million. We transact less frequently in commercial, so a high-performing residential agent might do 20+ properties, but our dollar bracket is higher, and we typically transact 10-15 properties a year. Some brokers might do 2-3, but are very successful because they focus on the $20 million+ bracket.

Daniel: I've got a bone to pick with you. Logan's been talking to some of my clients and maybe steering them in the wrong direction, in my opinion. I'm a residential guy. From the finance side, the commercial real estate numbers may look sexy, but sometimes investors can get too big for their boots thinking they can stomach commercial. I get a lot of clients who, once they've got six or seven rental properties, want to take the next step. The net yields of commercial real estate look really attractive, but I think residential is the best way to build your wealth, especially in the leverage stage. Interest rates are more affordable, loan terms are more reasonable, and you can do a high LVR in most cases. Sell it to us—why do you think so many clients are now trying to get into commercial?

Logan: I'd say, look at most successful investors in the world—they've got a diverse portfolio. Focusing on one asset class isn't the right way; you want to diversify, whether that's commercial property, residential, or shares. The major difference and why you'd pick commercial is the obvious one: yield is a bit higher. With residential, your returns are typically 2-3% gross yield. Commercial yields are typically 5-7% at the moment, and they're net yields. On top of the income, tenants are responsible for your outgoings—rates, insurance, even management fees—so the income you're getting is pure net income. With residential, you're responsible for that.

Rory: You're not getting calls from your tenant at 5am saying the toilet's broken. You outsource that management, which the tenant pays for in most cases.

Daniel: Speaking of yields, what are your thoughts on the broader market? Are there pockets of NZ with abnormally large yields?

Logan: It's very similar to residential. If you're chasing yield, the highest yields are in the regions, and that's typical with residential as well. We do see high yields in cities, even Auckland, but there's a reason for it—typically the building's got a lot of vacancy or needs a lot of CapEx. Higher risk. What a lot of investors forget is, you can chase yield, but there's more risk, and you're not going to get the capital gain like you would with a better property. Personally, I'd rather buy something at a lower yield in a really good location with a tenant who'll be there for a long time—very hands-free. A lot of those high-yielding properties require very active management.

Lending, Leases, and Market Outlook

Rory: With the regions, there's also lease or tenancy risk. Lease terms are another difference between resi and commercial. What's the longest lease term you're seeing in commercial?

Logan: We've seen government entities go up to 20-year terms.

Rory: For an investor, that's a dream, right?

Logan: Absolutely. But that comes down to the tenant spending so much on the fit-out—they're not in the business of owning property, they want to lease it. They've spent hundreds of thousands on fit-out and specialist equipment, so they're protecting their investment and are well entrenched.

Logan: With residential, you're lucky to get a two-year fixed lease—12 months is pretty standard. In commercial, minimum is typically a three-year initial term with rights of renewal. Residential is periodic or, at best, a one-year fixed lease.

Daniel: And with residential, the government tends to favour tenants, making it hard to evict if they're not paying rent. With commercial, it's a B2B transaction—the government doesn't really step in, it's between businesses. If things get bad, it's between the parties. For example, with rent reviews, if the landlord thinks the building should be $350 per square metre and the tenant thinks $280, they both get valuations and meet in the middle. Sometimes it goes to arbitration, but nobody wins in that situation.

Rory: For commercial lending, as a blanket approach, it's 30-40% deposit for an investment, interest rates are usually 1-2% higher than resi rates, and banks like to reduce the loan terms to ensure you're amortising the debt. You might get a couple of years interest-only, but it'll be on a 15-year loan term max, and the loan term is dependent on the leases in place. With really long leases, you might be able to negotiate a longer loan term. Residential investors have access to interest-only and 30-year loan terms—much more flexible.

Rory: Commercial has super sexy numbers, but over a shorter time horizon.

Daniel: What about cost of capital? What are our interest rates?

Logan: Commercial is typically 1-2% higher than resi. Right now, you can probably get 5.5-6% for commercial, and a one-year fixed for 4.49% for resi.

Daniel: I've heard there's a way around that—if you've got a million-dollar investment property or your family home, you can fully leverage up to 80% and use that cash for the commercial investment, getting home loan rates because that's the security in place.

Rory: That's right. So, let's meet in the middle. The best way to build a portfolio or start wealth is to get a family home, then a steady rental investment portfolio. Once you've built some equity, you can consider commercial, because you might have some cash to inject or enough equity to leverage, and even get interest-only or a 30-year term to make the numbers look better.

Daniel: I'll meet in the middle—I'm not going to write off commercial. It's important to diversify. But I don't think entry-level investors should discount commercial. There are options out there. If I had a million bucks and wanted to buy a commercial property, I'd probably buy an industrial unit—very simple buildings, concrete block, iron roof, very little management. You get a tenant in there, maybe a workshop, 800 square metre unit, typically body corporates, but as I mentioned, it's net yield—the tenant pays the body corporate fee.

Logan: There are entry-level investments out there for people. You can pick them up for not much cost—maybe $500k in Hamilton, $650k+ in Auckland.

Rory: Have you dealt with investors whose first entrance into property is commercial?

Logan: Yes, but it's rare. More common for owner-occupiers. I've had situations where someone in their mid-to-late twenties has built up a deposit, decided to go travelling, doesn't want to buy an owner-occupied property, and wants a hands-free investment. They've gone for commercial—net yield, good tenant, good lease, sit back and forget. With residential, the return isn't as good and there's more management involved. But there's not a lot of that stock out there—it's been snapped up.

Logan: In industrial, vacancy was less than 1% in 2021 in Auckland, now it's crept up to about 2.5-3%, but still low. If your tenant left, you'd have a flood of tenants wanting to get in.

Daniel: Can you give us a state of the nation on commercial right now? Are things feeling stable, is there more confidence back?

Logan: Let's do a quick 30 seconds on each sector.

Logan: Industrial: Still trading really well, vacancy at relatively low levels, lots of construction going on. There's just not enough industrial land in Auckland, so it's pushing out to Drury South, which is going gangbusters. Yields for really good investments with good leases and tenants are still in the high 4%, early 5% range, which is phenomenal given commercial lending rates.

Logan: Retail: Typically yields are 5.5-6.5%, maybe higher depending on the property. I'm pro-retail, probably a bit biased, but suburban blocks—five or six shops serving a large residential catchment—are always going to have local people feeding them business. Good suburban retail, especially sub-$2-3 million, goes really well. If you go to areas with vacancy issues, like parts of Newmarket, you'd expect a higher yield, closer to 6.5%, because if you lose a tenant, you might have a loss of income for a while.

Logan: Office: Typically the asset class with the highest yields, purely due to vacancy. There's a lot of opportunity there, though. High net worth, add-value investors are buying properties with vacancy, putting in tenants, increasing income, and creating equity. It's like residential—get it revalued, use the equity, rinse and repeat. But with more people working from home, office yields are higher.

Rory: Is there anything we haven't touched on that's crucial?

Logan: If you've got a commercial property, give me a ring!

Daniel: You couldn't help yourself.

Logan: No, absolutely. For your audience, just don't discount commercial—there's a lot of opportunity out there, and I'm happy to have a chat about it. We're in the best buying conditions at the moment. Yields have come down, vendors' expectations are more realistic, and business is starting to trade better.

Daniel: Interest rates are coming down, and things have got to improve—it's just how the world works. These interest rate drops are great, and while we're not seeing a direct correlation to property values yet, in six months' time there'll definitely be a shift. We're in the busy summer period, getting more enquiry as people want to buy before the end of the year, settle in the new year, and maybe interest rates will be lower by then.

Rory: You talk about office space and what COVID did—high vacancies everywhere—but there's opportunity there. With retail, you hear the scaremongering that retail's dead, but there's still opportunity, especially in local shopping strips. Keep an open mind.

Daniel: Absolutely. I'm really keen on commercial—after a few residential, I'm keen to jump in.

Rory: You almost bought a commercial property, didn't you?

Daniel: Yeah, I did. But you didn't call me!

Logan: You were involved, mate.

Daniel: Logan, it's been such a treat having you on. That was enlightening, so really appreciate it.

Logan: Thanks for having me. And it won't be long before you're back for your next market update. Thanks again.