Low CBD vacancy pushing occupiers further out

11:26 AM Wednesday September 10, 2014 Colin Taylor

Increased levels of activity and demand for quality in city fringe and suburban locations is putting upward pressure on both rents and yields, says JLL’s latest Pulse research report.

“Occupiers have started to look further out of the Auckland CBD for accommodation as vacant space becomes insufficient for larger occupiers and rents rise,” the report says. “Several corporates have expressed interest for new office blocks within the city fringe precinct and stronger demand is expected in the future as office space becomes even more limited in the CBD market.”

Yields have likewise started to compress over the last six months as investors demand improves with increased levels of activity and demand for quality in suburban locations putting upward pressure on rents and downward pressure on yields.

Demand

JLL Research says the level of vacant quality office space has hit historically low levels in the Auckland CBD causing occupiers to started to look further out for accommodation

The CBD fringe has experienced strong reductions in vacancy as tenant demand drives leasing activity and the Viaduct Harbour precinct has seen further tenant interest with vacancy now sitting at 3 per cent down from 4 per cent recorded in the first half of 2013.

Suburban vacancy rates have also decreased. Newmarket is seeing significant activity and, being close to the CBD, vacancy levels have fallen below 10 per cent. The Takapuna area has likewise seen a marked decline in overall vacancy levels which have fallen by 1.2 per cent to 4 per cent.  

 Demand.jpg

 

Supply

With the exception of Takapuna, suburban markets have seen good take-up the last six months with vacancy declining, despite some reductions in overall supply. There have been a number of properties taken out of the stock base for refurbishment over the past 18 months which will provide additions to the stock base over the next 12 months. This means that, although there is no ‘new supply,’ total stock will not remain flat.

Proposed developments in Albany, Smales Farm Technology Park and Takapuna will likely be pushed ahead with vacancy levels having reached 10 year lows.

 

Asset Performance

The CBD Fringe is proving to be a popular choice for occupiers being pushed out of the CBD due to a lack of adequate stock. Consequently, average rents have reacted increasing by 2.5 per cent to $203 per sq m. In addition to this increase in rents, incentives are also contracting (from 16.6 per cent to 15 per cent over the last six months). “With limited anticipated stock coming online over the next six months, we expect the city fringe to absorb more demand and show further increases in rents,” the Pulse report says.

Upper movement in Newmarket rents has been driven by increases to the lower end of the range over the first half of the year moving up 6.5 per cent from $155 per sq m to $165 per sq m. Takapuna has likewise seen upward movement in the rental series have been pushed up by 8.8 per cent to $218 per sq m driven significantly by a large jump in the lower end of the series.

 

 Assets Performance.jpg

 

Yields in the CBD fringe have seen another strong contraction over the past six months with upper and lower yields firming by 25 basis points and 50 basis points respectively. There are a number of transactions to report in the city fringe including New North Road in Eden Terrace achieving $9.7 million at an initial yield of 8.3 per cent. In addition, a 4365 sqm property on Parnell Road sold for $12.6 million equating to an approximate 9 per cent initial yield.

Average yields in Newmarket now sit at 8.38 per cent. The numerous developments in the area and its closeness to the Auckland CBD are attractive to investors and continue to push yields down. There were a number of major sales in Newmarket in the first half of 2014 alone including 79 and 103 Carlton Gore Road ($7.45 million and $26 million respectively) and a property on Manukau Road for $6.71 million at an equivalent yield of 8 per cent.

Takapuna average yields are at 8.3 per cent. There have been limited transactions in the Takapuna market in the first half of the year, however there are several key anticipated sales likely to take place in the second half of the year which will likely sure up the trend.

 Yeilds.jpg

 

12-Month Outlook 

As accommodation options continue to reduce in the CBD core and ‘frame’ (surrounding area), JLL expects an increased level of tenant inquiry in the city fringe over the medium term, resulting in upward movement in rents over the next 12 months. Limited new build development in the submarkets, plus longer fixed term leases, will help New Build rents remain firm for the foreseeable future.

Demand for suburban offices remains strong as several projects have been announced or are in the pipeline along with improving demand which should continue to support rents in their upward trend.

In line with increased occupier demand, we anticipate a continuation of strong investor demand resulting in a continued firming of yields to new low levels.

JLL Research advises tenants and occupiers in the Auckland city fringe and suburbs to take advantage of lower rents before demand picks up in the next year and lock in a medium length lease.

It recommends owners and landlord pursue an opportunity to renovate and improve buildings in time for a pickup in demand at the upper quality end.