A new dynamic is emerging in Auckland’s office market as Covid-19 puts the brakes on speculative development for now.
Colliers International’s latest monthly research report analyses the development pipeline in the city’s CBD and metropolitan office markets.
It found many projects that are not yet under construction are likely to be deferred until there is significant pre-leasing commitment.
Ian Little, Associate Director of Research at Colliers, says Covid-19 has put a hold on the ‘build it and they will come’ era.
Instead, there’s a new development mantra: ‘If they come, we’ll build it.’
“Over the last five years, developers have taken a speculative approach by progressing schemes with minimal, or in some cases, no leases in place at all.
“That is expected to change post Covid-19. Developers are still keen to get new office projects out of the ground, but they want significant pre-leasing commitment – especially from strong anchor tenants.
“As a result, we are likely to see developers deferring projects that are not yet under construction until they are pre-leased to satisfactory levels.”
Prior to Covid-19, office development activity had been ramping up due to several years of tightening market conditions.
At the end of 2019, vacancy within Auckland’s CBD had fallen to a historic low of 4.7 per cent while across the metropolitan markets the overall rate was just 5.6 per cent.
These low vacancy rates, combined with strong demand from occupiers, led to a development boom that is expected to add 122,000sq m of new office space by the close of 2021.
Five major projects under construction in Auckland’s CBD will add 87,000sq m of new supply by the close of 2021. In the metropolitan market, new build and refurbishment schemes will see 35,000sq m of supply added over the same timeline.
Little says the vast majority of these projects are close to completion and have high levels of tenant pre-commitment.
“We see no reason to believe these developments will be disrupted. However, Covid-19 is expected to have an impact on the future development pipeline.
“Prior to Covid-19, it was expected that the strong new supply pipeline would ease market conditions, but be insufficient to bring about an oversupply in the market. At the same time, increases in demand were expected to continue to encourage development activity.
“This view has tempered with the significant impact of Covid-19 on the economy, and question marks over possible long-term changes in work habits.”
Little says that when assessing future supply conditions, changes in the development pipeline are going to play out through the deferment of consented projects that have yet to move to the construction phase, or more likely, schemes that are currently at the planning and feasibility stage.
“As a result of these changing market dynamics, we now believe that projects with a potential total floorspace of 75,250sq m in the CBD and 73,300sq m in the metropolitan market will not proceed without suitable tenant pre-commitment.
“It is too early to classify any of these projects as having been abandoned. The pipeline is less certain and the length of delays unknown, however any particular project could move to the construction phase almost immediately should an anchor tenant be identified.“The deferment of projects will clearly act to minimise the increase in vacancy levels which are anticipated as a result of the completion of pipeline projects and the impacts of Covid-19.”