Hot in the city

Hot in the city

Auckland Office Workplace – February 2020

Auckland’s office sector in prime location

Vacancy rates which have trended down to historic lows have placed significant upward pressure on rentals. The response from the development sector with major projects, including Commercial Bay, will ease pressure until early 2021.

While this will increase opportunities for tenants, Bayleys Research sees little prospect of a significant oversupply, as the development pipeline thins out beyond 2021.

Business expansion drives workspace demand

Business creation and expansion has seen white-collar employment expanding rapidly. Since 2010, the white-collar employment count across the region has risen 34 percent, reaching 234,300, according to Statistics New Zealand. It increased by a further 4,100 between the 2018 and 2019 surveys.

Employment growth has continued despite business confidence measures being depressed since the coalition government came to power in late 2017. A sharp lift in sentiment in the ANZ Business Outlook survey late last year points towards further strong demand for workspace.

Firms’ expectations for their own activity in the year ahead rose 17 points, with a net +13 percent expecting business conditions to improve, the highest reading of 2019.

Employment intentions rose 12 points to a net three percent of firms intending to lift employment. Investment intentions rose 12 points to a positive net six percent.

Tight market conditions

Vacancy rates across Auckland’s major office precincts have trended down post the global financial crisis. In the CBD, rates have held at historically low levels as the leasing market has remained active ahead of new supply being released.

According to the latest Bayleys Research vacancy survey, across all precincts surveyed, vacancy stood at 5.6 percent, all but unchanged from 5.7 percent in January 2019. It has stood below seven percent since mid-2016.

Leasing activity has remained strong with available space in existing buildings, those under construction and those undergoing refurbishment all experiencing high tenant interest.

Tight market conditions are also, in many cases, seeing companies abandon plans to relocate, choosing instead to negotiate new leases within their current premises. Examples include BBDO and AECOM.

The pressure on the market is further illustrated by the successful leasing of 155 Fanshawe Street with major tenants Kiwibank, Southern Cross Healthcare and IWG, well ahead of the building’s completion.

New options but no oversupply

Recent years have seen a spike in development, particularly in the CBD and city fringe. However, the net effect on total inventory has been muted, due to lower-quality premises being removed, either permanently via conversions, or temporarily for refurbishment.

As a result, whilst the CBD’s office inventory is experiencing a lift in quality it has seen little increase in quantity, with total stock hovering around 1.4 million square metres.

Demand for apartments amid a housing shortage, and for hotels as tourism booms, have been the primary drivers of conversion.

Hotel conversions have resulted in removals including the ex-Reserve Bank building at 67 Customs Street East, making way for the SO/ Auckland hotel, and 396 Queen Street, now the Four Points by Sheraton, which removed some 8,000 square metres of office space.

Currently under redevelopment is 4 Viaduct Harbour Avenue, which has reduced the office inventory by 7,000 square metres.

The completion in 2020 of Commercial Bay, 155 Fanshawe Street and 10 Madden Street will add 62,500 square metres.

Beyond 2020 new supply will slow. In the year to June 2019, just 29,000 square metres of new office development was consented, down from nearly 58,000 square metres the previous year and an average of nearly 48,000 square metres over the previous five years.

Meanwhile, conversions will continue. While the refurbishment of 1 Queen Street will include office space, most of the building will be converted to hotel use, resulting in a net loss of 10,000 square metres of office space.

Development pipeline

It is not only the CBD and city fringe which have seen new development. Within the airport precinct, The Quad office campus, and within Highbrook Park, Highbrook Crossing, have been developed. Kiwi Property Trust has developed a 15,000-square metre office tower at Sylvia Park.

But office-building consents point towards a slowdown in construction across the wider region. Between 2014 and 2017 an annual average of just over 116,000 square metres of new office space was consented. This fell to below 45,000 square metres in 2018, and in the first 10 months of 2019 the total was 65,500 square metres.

Therefore, while pressure on the leasing market will ease over the next 18 months there seems little prospect of an oversupply. Tenants, though, will enjoy more options as occupiers move to the new projects, leaving their existing space to be backfilled. It is likely the rental rises of recent years will also abate.

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