Demand persists for prime office, retail space

6:40 PM Friday October 6, 2017 True Commercial

Upper-level prime CBD retail rents in Queen St are at a record high. Photo / Supplied

Demand for prime Auckland CBD office space remains strong due to resilient retail spending, a growing office worker population and increased visitor numbers over the winter months, says JLL Research.

The JLL Pulse report — measuring Auckland retail, office and industrial markets for the third quarter of 2017 — puts the vacancy rate at 2.9 per cent.

However, JLL’s Tom Barclay says, nearly all the vacant space comprises smaller tenancies, near the back end of the CBD.

“This is making it harder for larger retailers to enter the market at present and has forced some to consider alternate suburban locations,” he says.

The Commercial Bay development, to come on stream in 2018, will increase supply significantly and smaller laneway style developments such as Snickel Lane (connecting Fort Lane and Commerce St) have increased much needed supply this year. With the market tight for now, upper-level prime CBD retail rents in Queen St have hit a record high of $4160 per sqm.

JLL’s national director of retail Chris Beasleigh says he’s seeing strong retail demand from both home grown and overseas retailers, which is keeping the market buoyant.

“Suburban vacancy rates decreased slightly overall in our two survey areas of Newmarket and Takapuna. Demand for suburban space has been driven by the lack of suitable space available in the CBD, with many large retailers opting to occupy space in suburban shopping centres such as Sylvia Park.

“Due to the increased demand, several expansion projects are planned including works at Westfield 277, Newmarket and Westfield St Lukes.

“The average yield in the CBD market has firmed to a new low at 5.83 per cent and, while tight market conditions and growing demand will foster rental growth over the short term, CBD yields may see some further tightening over the next 12 months.

“Meanwhile, suburban yields have seen a marginal increase since the first quarter of 2017 with average prime and secondary yields sitting at 6.0 per cent and 8.6 per cent respectively.”

The report says that, in the CBD office market, overall vacancy has increased marginally due to refurbished stock such as 125Q re-entering the market. Other major refurbishments include the ex-Vodafone building, which has been refurbished for occupation by Auckland Transport.

Barclay says vacancy in the four premium towers has been as low as 0.5 per cent and looks set to remain low until new supply enters the market in 2019.

In terms of supply, despite removals for refurbishment projects, total stock has increased to 1.2m sqm thanks to the completion of the Datacom building.

New development is focused around the Wynyard and Victoria Quarters including 46 Sale St, the second stage of Precinct’s innovation hub and Manson’s development on the former Caltex site on Fanshawe St. “Recent demand levels and absorption rates mean that an oversupply situation does not look likely.”

In the fringe and suburban office market, CBD fringe vacancy has risen marginally to 9.6 per cent over the first half of 2017, while suburban vacancy has decreased to 8.6 per cent over the same period.

Demand for space in these areas remains robust due to limited options in the core CBD. Rental growth has continued over this period – particularly in the Takapuna and Southern Corridor areas, where average rental levels are sitting at $300 per sqm and $250 per sqm respectively.

“The rental growth is driven by large occupiers moving into these areas such as Vodafone which moved to Smales Farm in Takapuna, Mercury Energy which is moving to a new development in Newmarket; and IAG which is anchoring the new office tower at Sylvia Park,” explains Barclay.

In the Auckland City industrial market, rising rents and positive net absorption indicate strong occupier demand for city industrial space. This has been supported by the underlying strength of economy, and the high performance manufacturing sector which has translated to expansion plans for a number of occupiers. Despite competition from South Auckland, vacancy rates are very tight at 3.5 per cent which is well below the post global financial crisis average of 4.8 per cent. Supply is increasing to meet demand and the majority of development is focused around the Penrose and Mt Wellington areas.

Barclay describes the demand in the South Auckland market as being “robust”, with the precinct having the highest levels of net absorption across the Auckland region.

“Take up has exceeded 350,000sq m and vacancy rates remain firmly below 3 per cent despite unprecedented levels of new supply,” says Barclay.

Total stock in the South Auckland precinct now exceeds 4.7m sqm with most new development concentrated around the Airport Corridor, East Tamaki and Wiri. Rental levels have increased substantially in the past few years and it is expected that rental growth will be the key driver of capital values over the next 12 months given yield compression has slowed across the market.

In the North Shore industrial market, strong net absorption over the first half of 2017 indicates continued demand from the occupier market. The overall vacancy rate is 2.2 per cent making the North Shore the tightest industrial market in New Zealand.

“The low vacancy rates are due to restrictive zoning as well as the lack of suitable greenfield land to develop. This limited supply will remain a prominent issue for the North Shore industrial market,” says Barclay.

“Yields for prime stock have firmed to a record low of 5.88 per cent due to intense competition for stock when it becomes available. Outlook is positive moving forward, driven by rental increases in light of minimal new stock. However, a potential risk over the long term is tenant flight to South Auckland where there are significant developments being delivered.”