Central city office space squeeze is about to ease

Central city office space squeeze is about to ease

Office occupancy rates in Auckland’s inner city are the best they have been in many years but this could be as good as it gets for landlords. Increasing supply is expected to push vacancy rates up again this year.

Office vacancy rates in Auckland’s CBD and in the CBD fringe have continued to move down over the past year on the back of strong tenant demand, particularly for new premises.

Occupancy surveys of a total of 1,761,025m² of office accommodation across these precincts have just been completed by Bayleys Research. They show the overall CBD office vacancy rate has dropped to 6.4% from 7.8% in early 2016 while on the city fringe the amount of empty space edged down to 10.1% from 10.5%.

Prime grade (Premium and A Grade space) vacancy in the CBD has remained unchanged at a miniscule 2.4% despite an increase in the total inventory of 28,654m², the largest growth in new supply for six years. This increase is largely due to the completion of Fonterra’s new headquarters in Fanshawe Street and the BDO Centre at 151 Victoria Street West, now fully leased.

B Grade space is still the largest sector of the CBD market although the inventory has dropped to 517,704m² from 528,230m² a year ago as a result of refurbishments underway and redevelopment projects to apartments predominantly. The B Grade vacancy rate is now 9.4%, the first time that it has been below 10% since 2009.

C Grade vacancy continues to fall, now at 8.6% from 12.5%, with a continuing trend of C Grade space also being removed for a change of use.

Empty CBD office accommodation is now at its lowest level since Bayleys Research began its CBD vacancy survey in 2003, says Ian Little, Bayleys national research manager, and this is the first year overall vacancy has been below 7%.

“High levels of business confidence and employment growth in the service sector have been driving demand for office accommodation. However, it is likely that we have reached a cyclical low in terms of CBD vacancy as a substantial new development pipeline will begin to outpace demand.”

Little says there are already indications the tide is close to turning, with only a small drop in vacancy in the past six months from 6.7% in Bayleys Research’s July 2016 survey to 6.4%. The amount of vacant A Grade has increased over the past six months, its first upward movement in three years, due to the transition of large tenants in the northern CBD to premium grade buildings. More than 40,000m² of new prime space will also come on stream this year, Little says. This will include three buildings in the Wynyard Quarter – Datacom (16,000m²), Innovation 5a (8,500m²) and Bayleys House (8,000m²) – plus 46 Sale Street (10,000m²). Vodafone NZ Ltd is also vacating its 14,000m² head office building on Fanshawe Street as it consolidates in Takapuna. Auckland Transport will be the new occupant centralising from 19 to four buildings in the process.

“Most of these premises have already been pre-let, or are likely to be by the time they are completed, but the challenge will be back filling buildings they leave behind,” says Little. “In cases where tenants are centralising from a number of locations they are generally leaving more space behind than they are moving to because these new buildings enable them to occupy space more efficiently. Also the number of residential conversions could slow as a result of construction and funding capacity constraints. Therefore we would expect CBD office vacancy rates to start heading back up again this year unless there is a very significant increase in occupier demand.”

City Fringe

The city fringe, encompassing College Hill, Newton, Grafton, Newmarket and Parnell, has had a less pronounced decrease in vacancy than the CBD over the past year – less than half a percentage point.

However, the current level of 10.1% is the lowest recorded since 2009 and well below a post GFC peak of 16.9% in 2011. Little says fringe suburbs have continued to benefit from a good level of tenant demand for better quality premises. There was also a reduction in available office space of over 15,000m² as secondary graded buildings were removed from the office market permanently for a change of use to residential or, temporarily, for refurbishment.

Newton, Grafton and Parnell recorded reduced vacancy rates, Newmarket showed little change and the amount of empty space in College Hill increased. Parnell’s re-emergence continues with vacancy plummeting to just 3.2% from over 13% two years ago. Little says Newton is also a suburb that is likely to grow in popularity over the next few years as it benefits from the ‘catalyst’ effects of the city rail link and favourable unitary plan zonings which will lead to an intensification of mixed-use and commercial development.