New Zealand office property market review for 2019 and forecast for 2020

Positive economic conditions driven by population gains and high employment rates have delivered another year of solid activity in the office property sector. This is forecast to continue.

Difficulties for occupiers searching for suitably available prime space ready for occupation is an ongoing trend, which is enabling a supply response from developers. Refurbishment, strengthening, repositioning and new build activity is underway, but challenging construction sector conditions mean the pace of new space becoming available has not always met expectations. In many central office hotspots, conditions are tight, but there are opportunities for tenants to consider, more depending on the level of tenant flexibility.

The key occupiers driving office sector growth continue to be the FIRE sectors (finance, insurance and real estate) as well as local and central government. The contribution from technology-related services is also growing.

Many tenants searching for space remain focussed on traditional forms of leasing. However, the rise in coworking, serviced office space and other variations – focussing on the SME and start-up sectors – have proven popular. Colliers International APAC research shows this sector accounts for between 2 per cent and 9 per cent of total office space in major cities.

It is no surprise that the locations facing the most imbalance between demand and supply are where average prime face rents are escalating the fastest. Current growth rates of between 3 per cent and 5 per cent per annum are above long-term averages, especially in a low inflation environment. Insurance costs are rising in some cities. Incentives are available for the best tenants offering the best terms. The high cost of fit-outs has seen a renewed focus in this area, especially in centres where construction sector constraints are high.

While many locations are experiencing strong growth, there are options for tenants to pursue to reduce the impact of rising rents and operating expenses. Shorter lease terms is an area we are seeing tenants chase, perhaps in response to new IFRS requirements as well as reducing long-term commitments.

Investors remain confident and are focussed on economic and property drivers, the ability to increase cashflow through negotiations and/or asset repositioning, lower interest costs and pent-up purchaser demand. The rejection of a more comprehensive capital gains tax earlier in the year has also been a key motivator. The global hunt for higher returns has seen more active offshore purchasers and adds depth to our transactional activity. Overall, the outlook for office remains solid, supported by our net positive survey responses in the latest Colliers International Investor Confidence Survey.

Read the full series:
New Zealand industrial property market - 2019 review and 2020 forecast
New Zealand retail property market - 2019 review and 2020 forecast