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Auckland’s CBD office sector navigates change

Achilles House, 2-8 Commerce Street in Auckland's CBD, acquired last year by Kermani Group

Chris Farhi

Bayleys’ recently-released Auckland CBD Office Market Update highlights emerging trends and persistent market forces at play in the office realm and concludes it’s a mixed bag across the leasing, investment and development sectors.

Rising interest rates, galloping CPI figures and construction costs, lumpy supply chains and COVID’s long tail are countered by an occupier flight-to-quality, increased value placed on sustainability credentials, and the emergence of high-spec’ turn-key office suites as business owners seek locational and operational efficiencies.

Chris Farhi, Bayleys head of insights, data and consulting said owners and developers of office property in the CBD are being impacted by interest rate uncertainty, supply chain challenges, and inflationary pressures.

“That’s difficult to navigate – and the emergence of Omicron is prolonging those squeeze points and providing more bumps in the road,” he said.

“However, the continuing flight-to quality is seeing certain segments of the office market flourish and this includes turn-key office suites, and flagship best-in-class towers that have sustainability and design on their side.”

Farhi said the overall vacancy rate for the city office market sits at 10 percent, but within that, there’s large variation according to location.

“The persistent move towards the waterfront continues, hence vacancy in the popular Wynyard Quarter where large corporates have gravitated to is a low 1.2 percent.

“The drift is particularly prevalent amongst former southern CBD tenants due to the loss of amenity during the City Rail Link (CRL) construction.

“But in the mid-town area, and the Symonds Street ridge, vacancy rates have escalated – largely brought about by border closures and the subsequent lack of international students which has seen education-related tenancies empty out.

“Bayleys data also points to 18.6 percent vacancy (July 2021) in mid-Queen Street, although we are also seeing some refurbishment and redevelopment of some key buildings along the strip which is encouraging.”

With the sustainability narrative gaining traction among government and corporate tenants, green-rated campus buildings with strong design fundamentals and deliverable energy efficiencies are attracting discerning occupiers, said Steve Rendall, Bayleys national director office leasing.

“Development activity is focused towards large floor plate, campus-style buildings with high sustainability ratings and even with market and economic uncertainties, some developers are confident to undertake development with limited pre-commitment due to low vacancies for premium space.

“Bigger occupiers are seeing these flagship buildings as vital in the quest to draw workers back into the office to reignite corporate culture, and as a staff retention/attraction tool.”

The high demand for premium office space and the low levels of vacancy have seen an increase in rents at the upper end of the market.

“The benchmark prime office rents are in the range of $450 to $600 per square metre, but there are examples trading above this range particularly if incentives or fitout vary from market norms,” said Farhi.

The rise in uptake of turn-key office suites by small-to-medium businesses (SMEs) is a key trend in the CBD.

“Successful SMEs are willing to pay a premium for the quality and convenience of contemporary office suites anywhere from 80-350 square metres, with landlords and developers responding with increased supply and variety of turn-key offerings,” said Farhi.

“We could expect upwards pressure on rents for new stock coming to the market – both in the turn-key offerings and campus-style developments as the expected interest rate hikes take hold, and the shortage of building materials and supply chain hiccups continue to impact construction and fitouts.”

On the investment side of the Auckland CBD office market, the weight of capital is keeping yields low with interest rate uncertainty and heightened inflationary levels likely to impact rental rates as landlords look to lock-in CPI-benchmarked reviews.

“Rises in wholesale interest rates are expected to result in a softening of yields during 2022, however the weight of capital seeking placement is likely to balance some of the impact of interest rates,” said Ryan Johnson, Bayleys’ national director commercial and industrial.

“Investors are competing for premium office stock and benchmark prime office yields are sitting at 4.8 – 5.5 percent.

“With CPI inflation spiking outside of the Reserve Bank’s target band and with recent increases in the debt rate, we’ll be watching with interest as the year unfolds.”

Johnson said Auckland CBD office investment volumes in 2021 were at the lowest levels seen for some years at around just 16 percent of a normalised year.

“This can be attributed to border restrictions shutting traditional offshore purchasers of office assets out of the market, along with uncertainty around the impacts of hybrid working models for occupiers,” he explained.

“This disconnect within the market is evidenced by the fact that of the 13 office assets marketed in the second half of 2021, only one CBD office property was transacted – Achilles House in Commerce Street, acquired by Kermani Group.”

Following a strong level of activity in capital flows in the office sector on the eastern seaboard of Australia, Johnson said he’s expecting to see a significant increase in transactions for 2022 as investors look to fill asset allocations and border restrictions start to ease.

The traditional Auckland CBD office precinct still holds some compelling cards for occupiers, with a couple of notable areas ripe for a resurgence on the back of infrastructural initiatives and improved amenity.

Noting that parts of the CBD have been heavily impacted by the ongoing CRL works, Rendall said upper Albert Street and upper Queen Street will ultimately leverage off CRL benefits.

“The new Aotea Station at the corner of Wellesley and Albert Streets will allow seamless connection from outer suburbs for workers in that part of the city.”

Rendall said a concerted effort by authorities to address some lingering inner city safety concerns will also change the perception and values of office property in the broader mid-town vicinity.

“Bayleys is encouraging local and central government to rethink the operational approaches they can deploy to manage safety for the benefit of all landlords, occupants and businesses in the CBD.”

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