Strong tenant and investor demand for non-CBD offices

Colliers' latest office research released

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Office accommodation outside of the Auckland CBD became slightly easier to source for tenants over the past year, but quality office space remains in hot demand.

This is driving rents higher and investment yields lower, giving investors even more reason to purchase premises, according to the latest research from Colliers International.

Chris Dibble, Director of Research and Communications at Colliers notes that the overall Auckland metropolitan (non-CBD) office vacancy rate increased to 6.4 per cent in March 2019, compared to 6.0 per cent a year ago.

“While our survey covering more than 1.7 million square metres of non-CBD office space showed a slight increase in available space to lease, vacancy for prime buildings decreased from 5.4 per cent to 4.8 per cent. This represents just 19,400sq m of high quality vacant space.

“Tenants want higher quality due to the benefits in efficiency and productivity provided. Higher quality space also assists with staff attraction and retention.

“Located in prime locations, the best offices also have additional lifestyle features that staff and tenants benefit from. This includes access to parks and recreational facilities, retail, easy access to main arterial routes, suitable carparking as well as proximity to public transport,” says Dibble.

The latest Colliers research suggests that there are no signs of the pressure for finding quality space abating over the next 12 months.

Dibble says there is just under 40,000sq m of office space under construction in the Auckland metropolitan market, representing 2.3 per cent of current total stock.

Matt Lamb, Office Leasing Director at Colliers specialising in the metropolitan market, notes that high levels of tenant demand are keeping rents rising.

“Rents for new-build office premises in top locations are increasingly in the low $400 per square metre range. In some cases, this is pushing over mid-$400 per square metre territory,” says Lamb.

“There are options to secure space at reduced prices, but some amenity and quality will need to be foregone, and competition for the space will be high.

“Quality space is always in demand. However, we are also experiencing higher demand for lower quality space, especially contiguous space over 1,000sq m.”

The average prime metropolitan office net face rent increased by 3.6 per cent in the past year.

Not only are rental returns increasing, but yield compression continues to provide value upside for investors.

The average prime investment yield firmed by 56 basis points over the past year. This yield firming, along with steady rental growth, has led to the average prime capital value rising by 12.5 per cent.

Gareth Fraser, Auckland Director of Investment Sales, notes that competition remains high between metropolitan office property investors, driving up prices.

“We have experienced a significant increase in enquiry over 2019 on the back of a strong second half of 2018.

“We frequently have multiple unconditional offers on prime properties in the metropolitan market with investors looking to secure good property in a strong market that has the right fundamentals in place for further value appreciation,” says Fraser.

Reserve Bank of New Zealand statistics show lending to the commercial and industrial property sector increased by 5 per cent in the 12 months to April 2019 compared to the same period in the previous year. This additional liquidity is assisting investors and deal flow, but buyer enquiry is outpacing the supply of stock available for sale.

Colliers International Research tracks all commercial office sales in metropolitan Auckland. The latest figures show there was a 2 per cent increase in total sales value in 2018 compared to 2017 despite total sales volumes decreasing by 13 per cent over the same period.

The research found prime average yields across metropolitan Auckland range between 6.3 per cent and 6.9 per cent. These yields cover a wide geographic range including Botany, Papakura, Henderson and Silverdale.

However, Fraser says that in the central city and CBD fringe area, yields are frequently sharper.

“We regularly see sub-6 per cent yields, depending on location, tenant covenant and price range.

“Due to low interest rates and high levels of competition, we expect yields to remain firm and a positive investment environment for the foreseeable future.”

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