Out with the old, in with the new

Out with the old, in with the new

Space Race

A stream of new office developments in Auckland’s CBD is set to trigger a wave of new leasing activity – and will provide a unique opportunity for tenants at the bottom of the accommodation ladder to move into the type of high-quality office space that previously only big corporates could afford.

Development activity is focussed around the waterfront and is set to add over 100,000sqm of prime office space to the market. The introduction of new stock and new accommodation solutions, such as co-working, will ease pressure on vacancy levels and allow businesses, both big and small, to reassess their accommodation needs.

Adding to the momentum will be the pressure on the owners of older office space to repurpose their stock. Many will be eyeing the higher returns that could come from turning their buildings into residential apartments, student accommodation or hotels.

A changing city

Take a walk along the waterfront and you’ll see a dynamic CBD starting to take shape. The steel framework of Precinct Properties’ $941 million office and retail development rises from the site of the old Downtown shopping centre, heralding a new era of working and playing. Worksites restrict access to streets deep below ground level as work continues the City Rail Link, which will bring the city closer together.

Yet, even as the CBD changes, demand for office space remains high, driven by a growing office worker population and high business confidence. The latest Bayleys Research office vacancy surveys showing the availability of space falling in the CBD to 6.25 percent – the lowest figure since the survey began in 1992.

Bringing relief over the next two years will be a steady pipeline of new office accommodation, including Commercial Bay, Mansons TCLM's and Russell Group new buildings on Sale Street, further additions to Wynyard Quarter and Fanswhawe St and 27,000m² of new space under construction in the city fringe suburbs of Parnell and Newmarket.

New developments have already provided more than 50,000m² of prime CBD office space 2017, including three new developments in Wynyard Quarter - the Datacom building (16,000m²), the Innovation 5a building (8,500m²) and Bayleys House (8,000m²) – Mansons’ 46 Sale Street (10,000m²).

Property Council Head of Advocacy Matt Paterson says that when new prime space becomes available, it tends to be filled by blue-chip tenants. “This allows tenants in B-grade office stock to move into A-grade stock the blue-chip tenants previously occupied and so forth,” he says.

Currently, B-grade space forms the largest sector of the CBD market (517,704m2), while C-grade space accounts for 17.3 percent of the market.

Mr Paterson says owners of B and C-grade office spaces face tough competition from the new co-working facilities that have come online. “These provide small businesses and start-ups access to affordable, modern and flexible facilities in the CBD. We’re likely to see building owners upgrade their buildings to retain tenants who might otherwise be tempted by vacancies in higher-grade space,” he says.

As newer or upgraded stock come onto the market, second tier tenants may not need to spend all that much extra to secure accommodation in a new, Green Star-rated building.

New working practices, new opportunities

Co-working – at its most basic the renting of shared office space and facilities. It has long been the norm for tech start-ups and creative companies, but the concept is attracting many in the corporate sector who want to tap into the start-up culture and win new talent and new clients.

For many businesses, co-working is an easy one-stop real estate solution. For a monthly fee, members can hire a work area, be it a hot desk, dedicated desk or enclosed office, depending on their needs. They get all the facilities of a modern office yet they don't have to commit to a lengthy lease.

Bayleys Research shows that the office area occupied by co-working operators has almost doubled in over the 2017 calendar year, from 15,000m² to more than 28,000m², with a further 15,000m2 expected to be delivered in 2018 including the innovative B:Hive at Smales Farm – the largest custom built co-working building in Australasia

Bayleys Director of Commercial, Retail and Operations Lloyd Budd says the millennial demographic is one of the key drivers of growth in co-working. “Millennials are driving the co-working phenomenon in Auckland and big business is quickly waking up to its benefits,” he says.

“Over the next five years millennials will be the fastest growing age demographic – contributing about 70,000 people to Auckland’s workforce. Conservatively, the demand for co-working space could potentially rise more than eight-fold over this period if current global trends continue.”

He adds: “What is clear is that the leasing model is evolving and those landlords that provide occupiers with greater flexibility around time and space requirements are likely to end up winners.”

For the corporate sector, working alongside energetic start-ups and techies gives them direct access to a customer base and ideas that might otherwise be out of reach.

In Auckland, the average monthly desk rate for dedicated co-working space is about $600, with a wide variation in individual rates depending on location, quality and facilities. At the premium end, Generator’s Stanbeth House at Britomart space averages over $1,000 a month while The Distiller, located on upper Queen Street, caters to the budget end of the market at an average $300 a month.

Most of the current co-working offerings are centred in the Auckland CBD with the largest cluster in and around the harbourside, close to a wide variety of amenities and public transport connections.

Mr Budd says co-working will provide Auckland with the level of supply the market has been demanding “Co-working in Auckland has recorded strong growth over the past five years. From what was a core of three operators back in 2011 occupying around 1,400m² there are now around 13 operators occupying more than 30,000m²," he says.

“Most of the larger operators are looking to expand their offerings and believe there is significant scope to broaden the current reach from the ‘entrepreneurial-creative’ sectors to the more lucrative corporate sector.”

Time for change

Mr Budd says the range of accommodation options due to come on stream will be an incentive for tenants in B and C- grade stock to reassess their accommodation strategies.

Also providing impetus for change is the steady removal of older stock on the edge of the CBD.

C-grade vacancy has fallen to 8.6 percent due to change of use in C-grade stock.

Owners eyeing an exit from the office leasing market are capitalising on the increased in demand for residential, tourist and student accommodation.

Upgrading older office buildings in a competitive market could be less attractive to owners than transforming them into high-end apartment blocks, student flats or even hotels, where the returns could be much higher.

New Zealand Trade and Enterprise has identified a need for up to 4,300 new hotel rooms in Auckland over the next decade while the new government’s pledge to make the first year of tertiary education and training free will increase student numbers and increase demand for student accommodation.

Recent years have also seen multiple conversions of office space to residential apartments in Auckland, such as St James apartments in the former YMCA premises opposite Auckland Art Gallery; 62 apartments at 132 Vincent Street, formerly the headquarters of professional services company Beca; and Hopetoun Residences in the former Baycorp building. Civic Admin Building (The CAB) is currently in the process of being converted from the old Council Offices.

Mr Budd says: “Tenants in C-grade stock should consider the impact their current location has on their growth plans and their ability to retain staff and recruit new talent.

“The cost of relocating to higher-grade offices with better transport links and better amenities may not be as high as some think.

“Savings can be achieved through increased density rates, taking advantage of larger floor plates, or introducing efficiencies.”

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