Vacancy levels in Auckland’s CBD offices have fallen below 10 per cent for the first time since Colliers International started vacancy survey 12 years ago.
The CBD Office Market Indicators report shows vacancy levels dropped from 10.8 per cent in June to 8.6 per cent by December. The 2.2 per cent drop in only six months is the biggest recorded since 1996, when CBD office vacancy levels fell 3.2 per cent to 13.1 per cent.
Colliers International research director Alan McMahon says sound economic conditions and increasing business growth have been the main drivers for tenant relocation, expansion and consolidation.
The latest figures from the Property Council Performance Index show returns last year returns continued to be robust.
“While there is evidence valuers are adopting slightly higher discount rates, and capital value growth is slowing, rental growth continues to drive impressive returns,” says McMahon.
“In terms of Auckland CBD offices, the renaissance continues.” Total returns of 24.27 per cent for 2007 easily outstripped the annualised return over five years of 16.54 per cent and 10 years of 10.18 per cent.
McMahon says CBD office tenants are to some extent insulated from the difficulties experienced by those exposed to exchange rate risk, development finance risk, drought, and so on. Their apparent ability to pay increasing levels of rent, particularly for high quality property, is protecting investors from what might otherwise be a more volatile situation.”
The significant drop in CBD vacancies, says McMahon, can been put down to more tenants taking space in B and C grade buildings as vacancies in premium and A-grade stock remained at a low of 2.9 per cent.
Despite negative sentiment surrounding global credit issues, economic uncertainty and the demise of a number of financial companies, McMahon says Auckland’s CBD office market is strong. Six of the nine Auckland CBD precincts had a drop in vacancy levels. The Core and Symonds Street areas fell by 4.4 per cent.
“To predict the leasing market will remain unaffected by economic turbulence is stretching credibility, but the fundamental excess of demand over supply is so pronounced, it will not be enough to undermine the strength of the leasing market.
James MacCormick, Colliers International’s commercial leasing manager says ongoing leasing inquiry shows no signs of easing, making it increasingly difficult for tenants to find whole floors in premium and A-grade buildings.
“There are only three new buildings to be completed this year and they already have tenants lined up.
“Prime grade space of more than 2000 sq m is almost non-existent. There is only one prime CBD building able to take a large tenant and as a result many tenants have stayed in their existing premises or taken space over non-contiguous floors.”
MacCormick says there is demand from major tenants for 70,000-80,000 sq m of CBD space. “As the selection of prime quality space diminishes, the competition is heating up between bigger tenants for the remaining options.”
Limited new space coming on to the market this year and the first half of next year will further intensify demand, says MacCormick. “There is more than 100,000 sq m of proposed speculative development in the CBD, most of which will not be completed until mid- to late-2011. However, little of this development is guaranteed to go ahead.”
As the dearth of space bites, it is having an effect on rents, particularly at the top end. “New ground breaking rents have been set for leases and at reviews in the Lumley Centre, Vero Centre, and PricewaterhouseCoopers tower.”
Colliers International’s research shows a tenant’s lease on the 26th floor of PricewaterhouseCoopers tower was renewed at a rent of $550/sq m last year and several other top floors have generated rents of more than $500/sq m. Low rise developments are renting for more than $300/sq m and, in some cases, more than $400/ sq m, depending on quality and location.
MacCormick says with no new space coming to the market this year, he expects tenants to be hard hit at rent review as the pendulum has swung back to landlords.
While landlord incentives were common a few years ago, particularly when tenants took premium grade office space, they have virtually disappeared. “Incentives for B grade space have also tightened over the past year because there is little available space.”
It is likely, says MacCormick, this decline will be reversed when B grade space comes back on to the market over the next couple of years as existing tenants move to new premises under construction.
About 23,000 sq m will be available when Deloitte, BNZ and IAG move from their existing offices. IAG is moving to new premises being developed on the former Seamart site on the corner of Fanshawe Street and Market Place.
The unknown factor in the supply equation, says McMahon, is the vacancy that departing finance tenants may create, if more business failures occur. “Even if more high-rise floors become available, it won’t be enough to upset the fundamental CBD demand/supply imbalance.”
Last year the net amount of space leased over the space vacated was 30,600 sq m in the CBD, a clear indication, says McMahon, that firms appear to be reasonably optimistic.
The latest Hudson Employment Expectations Report shows while national employer sentiment has dropped 3.3 per cent, a healthy 35.7 per cent of employers expect to take on more staff.
Although the financial sector is in a tough cycle, the financial services and insurance industries expect to employ more staff, particularly banks who want to increase the level of personal service in branches.
Within Auckland, the telecommunications industry and the construction, property and engineering sector are propelling the region’s optimism, up at 54 per cent. Optimism from the telecommunications industry is being driven by expectations of further government intervention in local loop unbundling.
Some new large leases were signed last year predominantly to companies wanting space for business expansion or consolidation as well as firms upgrading. “Large floorplates continue to be highly sought after, with increasing demand from tenants seeking space of around 1000 sq m,” says MacCormick
Professional services company Deloitte has leased 10,660 sq m over the 10 top floors in Multiplex’s 80 Queen Street development through Colliers International. The company has taken a 12 year lease, 100 car parks and naming rights in the five star green rated building that will also house BNZ’s new Auckland headquarters.
While the CBD office market suffers from a lack of prime quality contiguous floors and stock, tenants wanting the convenience of a central city office have had to move into B and C grade buildings.
McMahon says vacancies in the secondary market have fallen to 9.8 per cent, their lowest level in a decade. “This illustrates the tight leasing situation, with a number of contributing factors – a dearth of premium and A-grade stock and the refurbishment and redevelopment of a number of older office buildings.”
Several significant inner-city buildings are being remodelled. Work has begun on the former Downtown House bought by AMP New Zealand Office Trust early last year. The listed property fund is investing $60-$70 million to redevelop the property into premium quality space and includes the addition of four new, column-free floors, adding more than 3600 sq m. It will be finished in mid- to late-2009.
AMP Property Ventures’ historic Imperial Building at 44 Queen Street is being refurbished into 3553 sq m of character office space over four floors for lease through Colliers International. Luxury goods retailers Gucci and Louis Vuitton have already taken the ground floor space and will open in late April/early May this year.
The former 1980s-built Simpson Grierson building at 92 Albert Street, now known as Telecom Tower, has undergone significant refurbishment and the 20-level tower is close to being fully leased with Telecom taking 5500 sq m and naming rights.
MacCormick says a number of other refurbishments are in the planning stage. Bluewater has several character buildings at Britomart earmarked for redevelopment, including the Barrington Gallery and Sofrana buildings. “These will create a variety of tenancy options including office, retail and residential.”
In the Core CBD precinct, the conversion of the former Reserve Bank building into Auckland’s first Pullman Hotel will remove 8353 sq m from the city’s office stock.
“With continually low prime grade vacancy levels refurbishment will continue to be a strong option for lower grade building owners.”
The New Zealand chapter of CoreNet Global is holding its annual symposium next month, with speakers giving their views on topics as diverse as the influence of technology on people and space, the challenge of carbon neutrality, how physical environments drive business success and the myths surrounding perceptions of the multi-generational workforce.
The symposium will feature strong local case studies to highlight the topics under the symposium’s theme of Leading Sustainable Business through Corporate Real Estate.
CoreNet Global is a global association of 10,000 people working in the corporate property field. The New Zealand symposium will be held on April 8 at Telstra Clear Pacific Events Centre in Auckland.
Download the full Auckland Office Market Indicators report
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