Auckland’s office sector in prime position
The investment sector, benefitting from the continuation of New Zealand’s low interest rate environment, has been extremely active during the year with sales activity bolstered by increasing flows of international funds.
Heightened levels of development will more closely align supply with demand over the next 24 months, particularly upon the completion of the city’s largest project, Commercial Bay. Vacancy rates though, are unlikely to increase sharply due to ongoing demand for space from alternative uses such as hotel accommodation, which is seeing the removal of secondary quality office premises for conversion projects.
Vacancy rates across the CBD are holding at historically low levels as demand has continued to run ahead of new office completions. White collar employee numbers, in Auckland, increased by a further 8,400 in the year to February 2018, according to Statistics New Zealand. There was also growth in the number of locations from which business is conducted across the region. Business units increased by 2,100 taking the total to over 110,000 for the first time.
The new business formation and business expansion which the above figures illustrate has clearly fuelled demand for office space. As a result vacancy within the CBD’s office stock has held at close to record low levels. At the date of Bayleys Research’s mid 2018 vacancy survey overall vacancy stood at approximately 5.5%, all but unchanged from the figure recorded a year earlier. Prime vacancy stood at just 3.5%, again unchanged from the mid year 2017 total.
The vacancy rate’s cyclical peak was reached in early 2010 reflecting the impact of the Global Financial Crisis and New Zealand’s recession. As the economy recovered tenant uptake resumed and vacancy rates began to decline.
The reduction in vacancy rates was led by the prime sector as the flight to quality gathered momentum. This saw vacancy rates across premium and A grade property falling from a peak of 12.3%, as at January 2010 fall to just over 3% by mid 2014. At that stage vacancy within secondary grade properties was just reaching its peak. Over the last four years however, the secondary sector has seen a significant tightening of conditions as options for tenants have become rarer.
It is likely to be late 2019 or early 2020 before new supply offers significant relief to tenants when Commercial Bay is scheduled for completion. In addition, the Wynyard Quarter will see 12,000m2 at 155/167 Fanshawe Street, currently under development by Mansons, completed. There is scope for further significant development to be completed through 2020 and 2021 within the Wynyard Quarter, Viaduct Harbour and Downtown precincts.
Upon completion of the major projects outlined above, there will, in all likelihood be a softening in market conditions, particularly within the secondary sector as occupiers move to their new premises from existing space. The uplift in vacancy rates though will be limited.
Demand from both the residential apartment and the commercial accommodation sectors will cap the increase in vacancy which the above new supply may elicit. Conversion of secondary quality office space to meet the shortages within these other sectors will see redundant floorspace being removed from the city’s inventory.
The Sofitel So/, on the corner of Customs Street East and Gore Street is the latest example of a completed conversion project. The development has added 130, 5-star quality, rooms to the city’s inventory. Other projects recently completed include the Four Points by Sheraton development, which removed approximately 7,800m2 from the office stock, and conversion of 4 Viaduct Harbour Avenue, where work has recently begun, will see approximately 6,800m2 of office space converted. In the latter case the property had been substantially vacant from February 2017 and therefore the removal of stock will see a tightening of the vacancy rate within the Viaduct precinct.
Given that forecasts for the tourism sector point towards long term significant expansion, demand for hotel rooms is likely to persist for some time, developers are playing catch-up following an extended period of limited new hotel supply in the CBD. The increase in room numbers over the next couple of years will certainly ease pressure within the sector. However should visitor numbers continue to grow at the rates forecast we expect the operating performance of hotels to remain strong, especially during peak seasons. Hardly surprising that a growing number of international hotel developers and operators are searching for opportunities in the Auckland CBD.
Slowing development activity to maintain balance
Consents data issued by Statistics New Zealand shows the development sector to be adopting a cautious approach on further large scale additions to supply. While, as outlined above, a number of property owners have the ability to bring new projects to market it is likely that they will gauge demand following the completion of the current development pipeline. Over the short term future new development will proceed, predominantly, only if significant tenant pre-commitment has been achieved.
Over the year to October 2018, building consents issued for new office premises across the Auckland region have a combined floor area of just 22,250m2. This compares with 168,000m2 in the 12 month period ending a year earlier. Between 2010, when vacancy levels within the CBD were at their peak and 2017 the annual average new floorspace consented has stood at 94,500m2.
The slowing in construction activity which the consent figures indicate is positive for the sector as it significantly reduces the risk of an oversupply of space occurring should the economy soften post the completions of the current development pipeline.
Expansion of co-working and flexible workspaces part of the global trend
Co-working space has been in growth mode for a number of years now within Auckland. At the beginning of 2018 co-working operators occupied 29,400m2 of space across Auckland. Development activity already in progress along with proposed new projects will see this inventory exceed 50,000m2 by early 2019.
The local market is currently dominated by the city’s three largest operators Generator, BizDojo and B:Hive who, between them control 71% of the total space and continue to grow their offerings.
The two biggest players in co-working globally (WeWork and IWG who own Regus and Spaces) have been eyeing the New Zealand market. IWG have secured space within the Commercial Bay development leasing level 18 of the office tower. Users will be able to occupy space on a wide range of flexible terms from daily, on a pay as you go basis, through to fixed terms which can range from a month to a number of years.
The expansion of flexible workspace within the city mirrors global trends as highlighted in research conducted by Bayleys' global partners Knight Frank. In its (Y)our Space report the growth of flexible working environments was identified as one of five themes that will shape future occupational demand across global real estate markets.
The report states that although, serviced and flexible office space has featured in global office markets since the early 1990s, 2017 was the year in which space-as-a-service really started to capture both headlines and attention within global property. Recent estimates suggest that there are now almost 18,000 co-working spaces around the world, accommodating almost 1.7 million workers – representing growth of 3,500% and 8,000%, respectively, since the start of this decade. Indeed, the growth has been so startling that lettings to co-working operators have become the mainstay of many global leasing markets.
As if to underline the point, perhaps the most widely known co-working operator, WeWork, has become, within just eight years of its formation, the largest private occupier of office space in both London and Manhattan.
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