Growing demand in Auckland’s Southern Corridor

12:22 PM Wednesday September 10, 2014 Colin Taylor

Improving office occupier demand in Auckland’s Southern Corridor running from Newmarket to Ellerslie has driven vacancy levels lower and investors continue to show interest with yields moving lower, says JLL Research.

The agency’s latest Pulse report on the Southern Corridor office market says strong interest for new build space in the area has driven further development.

Demand

Occupier demand for the Southern Corridor precinct has moved higher over the period. The area recorded positive net absorption of 2069 sq m, due to several new tenants moving in to Great South Road, over the last six months.

“The majority of new arrivals were pushed out of traditional markets in the Auckland CBD and other Suburban precincts,” JLL says.

As a result, vacancy has fallen from 120 basis points to 7.1 per cent which is around the 10 year average. Several near term expiries may have an impact on vacancy over the short term however diminishing options for occupiers elsewhere will support a rebound.

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Supply

Construction has started on Goodman’s One Central Park 6250 sq m speculative office development but this is not expected to come online until late 2014 or early 2015. This project has also spurred on other developers to start new projects within the precinct. A new two-level, 500 sq m development has been announced at Pacific Rise, which is expected to be completed in the late 2014. While the size is relatively small, this is expected to receive a strong tenant inquiry from small to medium sized business looking for quality grade space.

Refurbishment of current buildings is starting to increase although levels still remain at relatively low levels.

One level at 99 Great South Road was taken into refurbishment for restoration works while one level at 401 Great South Road has come back into the stock base.

 

Asset Performance

Average rentals for the Southern Corridor area have moved higher in the first half of the year, up 1.1 per cent to $228 per sqm. This was due to upper end rentals being driven higher as demand for quality space remains at elevated levels.

Suburban new build rents have been increasing since the global financial crisis but the last six months did not see any growth. Evidence suggests however that demand for new build is growing, with two new builds already being confirmed and redevelopment work is on the increase. In the meantime, a lack of quality new stock and resultant demand pressure will likely push rents higher, especially in the upper segments of the rental range.

There is now clear re-pricing momentum being seen in the Southern Corridor with both the upper and lower ends of the range contracting by 25 basis points each. The largest sale was at Pacific Rise in Mount Wellington at $10.4 million at an approximate equivalent yield of 9 per cent however this deal reflected the intentions of an owner-occupier purchaser. Reports from brokers in the area support quickly firming yields.

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12-Month Outlook

JLL Research says the Southern Corridor remains well positioned to see continued growth in both rents and capital values especially for new build properties.

“Development levels within the precinct are continuing to move higher and we expect to see vacancy levels return to below the long-term average over the medium term as occupier demand remains strong,” the Pulse report says.

“Yields are likewise expected to see further compression as interest from investor continues to grow, and we expected average yields to firm to 8.4 per cent by mid 2015.”

JLL says thebalance of power in the Southern Corridor continues to shift from tenant to landlord with rents remaining stable, so now is the time for occupiers and tenants to secure long term rents before increases crystalise on the back of firmer demand.

Owners and landlords are advised that higher quality new build space continues to be sought after. With a restricted medium to long term supply pipeline, landlords should explore opportunities to capitalise on this trend if current expiry profiles permit.