Tenant demand for quality office space driving low vacancy rates
This week, Colliers International's Research team is reviewing New Zealand's commercial property market across the key sectors. In this instalment, Research and Communications Director Chris Dibble looks at the office market.
Overview: Office tenant focus on quality, new and existing, pulled down the prime vacancy rate for the first time in almost three years to 3.5 per cent in June 2018 with the secondary vacancy rate at 8.1 per cent. Over the next five years there is expected to be 110,080sq m of office space under development, representing 7.6 per cent of the total floor space. This is unlikely enough to satisfy current demand. Prime net face rents have increased by 2.5 per cent over the past year. Yields continue to firm, and capital values rise in a low interest rate environment. This has kept sales activity buoyant, especially from offshore buyers.
Forecast: Our forecasts indicate that vacancy rates will remain broadly in line with current rates until 2020 when major CBD office projects complete. More demand for fewer pockets of prime space available over the next 12 to 24 months means rents will continue to rise by around 3 per cent to 4 per cent per annum until more supply becomes available in 2020. An increase in incentives will be likely in the run-up to 2020. Yields are forecast to firm by approximately 50 basis points over the next 24 months and remain steady, then rise gradually as global interest rates rise.
Overview: Office space in Wellington’s CBD remains tight after the significant reduction in total supply following the Kaikoura earthquake. Vacancy remained steady at 7.7 per cent in June 2018, down from 10.5 per cent pre-earthquake. Around 25,180sq m of new build space was recently added to total supply with the completion of Deloitte Building and PwC Centre, both opening with 100 per cent occupancy. Prime gross face rents increased by 5.9 per cent over the past year, now at $509 per square metre. Average prime CBD office yields have firmed 25 basis points to 6.6 per cent compared to a year ago. Seismic issues remain a focus for any occupiers and investors in Wellington.
Forecast: Demand pressures continue in the CBD as the capital’s shortage of office space drives the sector, especially for high quality space. Strong pre-commitment of new buildings will assist with short-term market growth, but the addition of 90,000sq m of premises either under construction or being refurbished over the next five years will alleviate acute supply shortages. We forecast rental growth for prime and good quality secondary office space to increase at 3.0 per cent per annum over the next few years. Yields will likely firm by approximately 45 basis points until 2020.
Overview: There has been a sharp decline in CBD office development over the past year. The peak of development activity in 2015 of approximately 142,500sq m is just 9,500sq m in 2018. With 356,000sq m of total CBD office space, expected to increase to just under 370,000sq m of space by 2019, the market is entering a more stable phase of activity. Assisting the growing tenant base at the high-quality end of the market is the level of face rents which typically range between $350 and $370 per square metre, down from historic rates. Incentives in the form of rent free periods and fit-out contribution are available. Strong investment demand sees CBD yields ranging between 6 per cent and 7 per cent.
Forecast: Leasing activity will grow. Continued tenant relocations from the suburbs, the internal CBD churn of existing tenants and small tenant leasing activity will mean some tenant’s will need to forego their exact requirements, despite a 20 per cent vacancy rate expected next year. Rents are projected to remain broadly in line with current rates and maybe a tad softer for some, but investment demand will remain solid from locals, North Island and overseas purchasers, keeping yields firmly at current levels for the next 12 months.
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