Auckland CBD office market moves in favour of landlords

11:48 AM Wednesday September 10, 2014 Colin Taylor

Auckland City Aerial shot

Auckland’s office market continues to shine as confidence remains high, says JLL’s latest Pulse market research report on the city’s CBD  core and “frame” (surrounding) city areas. 

The report says robust economic fundamentals and strong trading conditions are filtering into the commercial property market with strong economic data and strengthening business confidence driving office leasing activity.

“Office vacancy for Auckland region has fallen by 1.3 per cent to reach 9.1 per cent in our latest vacancy survey,” JLL Research says.

This fall in vacancy was largely driven by Auckland CBD office market which has seen vacancy shift to 8.7 per cent from the 10.5 per cent in December 2013. With vacancy now below historic levels, the market is moving in favour of landlords. This is especially pronounced in the prime end of the market which has fallen from 5.7 per cent to 1.6 per cent however, the secondary continues to lag, declining by 0.2 per cent to 13.3 per cent.

There is limited supply expected in the short to medium term in the CBD and as a result JLL believes that vacancy will continue to fall as occupier demand remains strong.

“These vacancy levels are low enough for rents to see upward momentum and we expect this to continue for the next 18-24 months,” the Pulse report says.  

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Building supply

 

JLL says the  Auckland CBD office pipeline is likely to remain dormant over the next 12-24 months, with only developments in the CBD Fringe and Viaduct Harbour under way. These include Fonterra’s new headquarters on Fanshawe Street and Mansons’ circa 18,600sqm development in Victoria Street West. These developments are, however, expected to be completed by 2015/2016 meaning there is currently no immediate ‘pressure valve’ in the market for growing occupier demand.

A significant amount of the negative absorption seen in the ‘frame’ is attributable to secondary space being taken out of the stock base for refurbishment. Limited amounts of quality space available in the CBD core and increasing demand pressure is encouraging owners of secondary stock to spend the capital on refurbishing to address likely future demand.

“We expect therefore to see several new assets enter the market at higher grades (likely Grades A and B) satisfying some of the demand pressure over the next 12 months or so,” the Pulse report states.

 

Asset Performance

With positive economic performance and strong forecasts over the next few years, investor confidence remains high and as a result yields have continued to compress. Transaction activity now sits well above long-term averages with demand being seen in both the prime and secondary segments of the market.

As a result, yields in the prime end of the market have continued to decline, now averaging 7.3 per cent. In the secondary space, both the upper and lower ends of the range firmed by 25 basis points in the first half of 2014 with the average now sitting at 8.6 per cent.

A number of larger office properties over $5 million continue to transact with over $499 million selling in the first half of this year. Several key deals in Auckland in this period have included the sales of Building C of the Telecom Building and Chorus House which sold for a combined figure of around $153 million.

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12-Month Outlook

Strong economic data and high levels of business confidence have continued to filter into the commercial property market especially in the prime sector, which has been actively sort after by both investors and occupiers.

The remaining space in the prime segment of the market is expected to be quickly absorbed over the short-term with rentals expected to see strong upward movements shortly thereafter. This demand is likely to then move into the secondary space, which will boost the market and drive the next phase of the expansion cycle.

“With strong investment activity already being witness over the first six months of 2014 and a number of large transactions expected to be completed over the next six months, we predict that 2014 will see the beginning of a steep growth curve for Auckland commercial property,” JLL says.

The Pulse report recommends that tenants and occupiers seek quality properties to lease in outlying CBD frame areas to secure the best opportunities before conditions tighten.

It recommends that owners and landlords seek opportunities to re-position their buildings to reflect the highest quality possible, providing options to those tenants turning to quality.  

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