Market momentum is moving in landlords’ favour at the prime end of the Auckland CBD office market and in quite the opposite direction at the lower end, says Alan McMahon, national director of research and consulting at Colliers International.
Landlords of prime buildings are able to take advantage of a gradually improving economic environment and re-emerging tenant demand, in the context of the availability of very few whole floors; while owners of older secondary quality properties worry about earthquake strengthening costs, weak tenant demand and static or falling rental and capital values.
Premium vacancy down by 6.1% in past year
Overall vacancy in the Auckland CBD is down to 10.9% from 12.2% a year ago, tracking just below the 15 year average of 11.8%. However the decline in vacancy is more pronounced in premium buildings, reducing by 2.4% in the past six months and 6.1% in the past year. With much of the job growth in the country concentrated in Auckland, whole floors of prime CBD office space are in short supply and this problem is exacerbated by the lack of major developments occurring in the CBD core. It is estimated that only 8316m2 is under construction in the CBD, a stark comparison to the 30,400m2 being built in the city fringe.
Our latest survey shows only 36,985m2 of vacant prime stock compared with 108,991m2 of secondary, equating to a vacancy of 8.7% and 11.9% respectively. Auckland Council’s move into the ASB Bank Centre on Albert St will mean a lower vacancy rate in the CBD than previously forecast, as council staff move out of seven buildings around the CBD. The prime vacancy forecast for 2013 has reduced by 4.1% to 9.6% and will decline quite sharply from then on.
Leasing activity steady
Leasing activity has continued steadily in Auckland over the past 12 months, sustained by higher than expected demand from business tenants for prime office space. Prime rents in Auckland have declined 1.2% in the past 12 months, but more recently, they have begun to move upwards as a result of incentive packages easing. On the other hand, rentals in the secondary market have generally been static.
Overall, the CBD office market in Auckland has performed much better than other main centres such as Wellington. Seismic issues are less severe in Auckland, but will soon be felt. As the economy picks up, landlords of better quality buildings can anticipate an increase in rental in the next 12 months. The Auckland CBD office market will continue to lead
Increasingly sophisticated decision-making among tenants, and their desire for more predictable future cash flows in all aspects of their business; combined with the risks around earthquake-prone buildings, augur well for landlords of prime modern office buildings in all the main centres. Removal of lower grade office properties from the tenantable stock will be significant, and is encouraging us to re-examine our estimate of medium-term prime rental growth for both Auckland and Wellington CBD offices.
Less fortunate are owners of the older C or even B grade buildings who face a nasty cocktail of decreasing value and demand, along with increasing insurance costs. The well-established outperformance of prime stock and secondary will be more evident than ever in the next five to 10 years.
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