We look at the key trends in the New Zealand office property market in 2020 and what to expect in 2021
Office markets across the country are experiencing a rise in space availability as businesses reflect on the changing economic situation and pivot to new workplace strategies due to Covid-19. However, different market dynamics are emerging across the country and more positive economic projections are emerging.
In Auckland, the overall vacancy rate increased to 6.3% in June 2020, however a preference for quality has seen the prime grade vacancy move to just 3.5%. In Wellington, where the market is more insulated by the significant government presence, overall vacancy increased from 6.1% to 6.4% over the six months to June 2020, while prime grade vacancy was just 0.6%. In Christchurch, where supply has been more readily available, vacancy within the CBD was 14.9%.
While disruption to traditional work practices over the short-term can be expected, from 2021 we expect to see a greater number of employees returning to the office. While companies will continue to allow some flexibility, they will likely promote a return to the office as the limitations of working from home versus working in the office become increasingly apparent.
There has been significant new supply added to total office stock across the country in recent years, however Covid-19 has deferred the number of previously planned office projects, limiting uncommitted supply. This will assist in limiting the potential rise in vacancy rates which would have occurred had the pre-Covid-19 pipeline progressed as previously planned. Over the short-term, new development will predominantly be dependent upon significant tenant commitment being secured.
The tight market conditions experienced over recent years has seen upward pressure applied to rents bolstered by the addition of new supply which has set new rental benchmarks. There is a variation in rental rates dependent upon the quality of the space on offer, however, face rents are generally holding in the prime sector in most major cities across the country. However, the level of incentives on offer has increased, primarily through an increase in rent free periods or more generous contributions toward fit-out.
The low interest rate environment has heightened interest in higher yielding property investment assets. There is a wide variation in purchaser types, but local purchasers remain the most prominent, a situation likely to persist until border restrictions are removed. Experienced investors continue to look through the disruption to office occupier conditions caused by Covid-19, with high levels of enquiry for well-located properties with strong fundamentals.
Regional market variations are also apparent with many locations insulated by strong periods of tenant demand in recent years, limiting a significant rise in space. While some opportunities are arising, prime locations remain sought after.
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