Research shows changed dynamics in CBD office space
Auckland Office Workplace – Feburary 2021
Around the world, central business district office space came under the spotlight during the pandemic as millions of office employees were ordered to work from home and at worst, some businesses were forced to shutter parts of their operation.
With New Zealand among the first countries in the world to quash widespread community transmission of the virus, and subsequently, to allow people to return to their physical place of work relatively quickly, it would appear that the Auckland CBD office sector has fared better than first expected.
Director Auckland Commercial and Industrial
Lloyd Budd, Bayleys’ director Auckland Commercial & Industrial says while vacancy levels have risen – particularly with the emergence of significant sub-lease or shadow space – and some developers are exercising caution around new pipelines of space, he senses cautious optimism in the market.
“Any shake-up in the broader property arena goes hand-in-hand with opportunity,” he says.
“We’re observing thoughtful, well-considered strategies among landlords and occupiers around space requirements and how leases are structured, leading to some innovative solutions.”
“It’s fair to say it will take some time for the dust to fully settle on the COVID-19 scenario and the impact it had on the workforce and the workplace – but Auckland is very well-served by a wide range of office property.
“As market commentators across the board have confirmed, there is still solid demand for corporates and businesses to have a CBD office presence, but we are seeing this supplemented and complemented by some satellite space to offer flexibility and agility.”
IN THE SHADOWS
As office occupiers reassess their current and future space needs amid changing expectations about what workplace environments should look like, there’s been some notable corresponding changes in office property market fundamentals around New Zealand.
Budd says sub-leasing under-utilised space – or shadow space – is an effective way for an occupier to reduce their operating costs.
“They can recover a portion of their occupancy outgoings by leasing it to someone else and it’s potentially more efficient when compared to the cost of exiting a lease completely or relocating to a smaller place.
“Changing work models in response to improvements in technology and trends being seen globally mean that many businesses no longer require large tracts of office space consolidated in one central location.
“Some are adopting a core + flex model with a more-condensed centralised hub supplemented with satellite space elsewhere, which is freeing up inner city office square meterage, while others are embracing more flexible styles of working with a mix of working from home, third place space and co-working options.”
Shadow space is putting some downward pressure on rents – and leasing values are also being impacted by the relatively large supply pipeline coming to the market in the Auckland CBD with some significant new stock completed over 2020, and still more to come this year.
National Director Real Estate Advisory
Bayleys’ national director real estate advisory sales, Stephen Rendall, explains that the emergent sub-lease space in the Auckland CBD market is coming from a range of business sectors, with the majority of them being those that could quickly and seamlessly switch to more-remote working models or those who have faced significant restructuring resulting in reduced staffing headcounts.
“A few large occupiers will take their time in making long-term decisions on how they will continue to use their office space and whether they will in fact require pre-pandemic levels of office space going forward,” he says.
“Some of the smaller occupiers will ride the wave and opt for shorter-term solutions before making any sweeping longer-term decisions.”
Vacancy rates – both direct and shadow space – in the CBD office market have increased in the fallout from COVID-19, and they have increased in all precincts, according to the latest Bayleys Research vacancy survey conducted in December 2020.
“Since the start of 2020, overall vacancy increased by 4.53% to 9.93%,” says Budd.
“As we have touched on, vacancy has increased for various reasons – from having more available stock to choose from in the market to occupiers going out of business, downsizing or staff moving to more-remote working models.
“The high levels of leasing activity that we witnessed at the start of 2020 have re-emerged as businesses reassess and monitor their occupancy strategy, while the recent completion of new developments has also contributed to excess space in the Auckland CBD market.”
Data shows the education precinct has experienced a big increase in vacancy, as international student numbers drop off due to border closures.
The recognised Symonds Street Ridge precinct has seen a notable rise in vacancy going from 5.28% to 17.57% over the course of 2020.
“However, there have been many new initiatives floated around getting international students back into the education system here so things could change for the better in these established precincts,” says Budd.
He goes on to say secondary-quality stock will inevitably face a challenge over the coming months with downward pressure on rents as occupiers consider higher quality space with better amenities for staff, and businesses continue to evolve their operating models in response to a changed marketplace.
Meanwhile, vacant space in prime quality buildings should normalise over the coming months.
NEW PHASE FOR DEVELOPMENT ACTIVITY
Vacancy levels reached historically-low levels in the last five years pre-COVID-19, going as low as 4.92% in 2018.
In response, developers upped construction activity trying to meet demand and some of those developments have now come – or will soon be coming – to the market as new office space.
Completions of 2020 include the iconic PwC Tower at Commercial Bay which adds 39,000sqm of premium quality office space and the recently- completed 15,000sqm One55 Fanshawe Street comprising seven levels of prime office space.
Auckland CBD has also seen significant refurbishment of older office stock, with retrofitting to include collaborative spaces, breakout rooms, more natural light and end-of-trip facilities.
“An excellent example of this is 8,500sqm at 131 Queen Street, which is being refurbished to mark WeWork’s entrance into the New Zealand market,” says Budd.
Some existing office stock has also been removed from the CBD market – such as the recently-completed QT Hotel in the Viaduct Harbour, where circa 7,000sqm of office footprint has been absorbed into the accommodation sector.
Decisions around the future supply pipeline of new office stock has understandably undergone some introspection according to Budd.
“A new development at 1 Queen Street is currently being reviewed by Precinct Properties as they balance the office/hotel mix and further analyse fundamental demand drivers.
“But we do expect continued demand for high-quality CBD office space with large floor plates, abundant natural light, and other laudable sustainability fundaments, while older office stock will continue to be converted into other uses.”
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