Auckland CBD rents poised to rise

10:26 AM Thursday October 9, 2014 Colin Taylor

Lack of space in Auckland offices will drive rents up.

Big rent increases by Auckland city office landlords are forecast in the latest New Zealand CBD Office Report produced by Colliers International.

Chris Dibble, national research manager at Colliers says tenant demand and a lack of supply will drive rents up.

“The unprecedented level of demand exhibited for prime sector office accommodation and low supply currently being constructed in the CBD will lead to a sharp rise in rents at the top end,” he says.

“We are now forecasting annual appreciation in net face rents of between 5 per cent and 7 per cent per annum over the next two years in the prime sector. The overflow of tenant demand expected for the secondary sector will impact secondary rents, with a jump between 3 per cent and 5 per cent over the next year, followed by lower rates thereafter.”

Dibble says the Auckland CBD office market and city office markets all around New Zealand have entered “the next phase in the cycle”.

“Propelled by a lift in economic conditions not experienced since before the global financial crisis, demand for prime quality office space is unwavering. A shortage of top end space available to lease is a predominant feature in Auckland, just like many other CBD office markets across New Zealand. Landlords in locations with the highest levels of demand are now confident in demanding rental rate rises and reducing the level of incentive packages.”  

The Colliers’ office report says businesses have expanded into under-utilised space, and buildings with extra capacity have been quickly absorbed.  

“The prime sector vacancy rate in the Auckland CBD is just 1.4 per cent below our forecast of 2 per cent. It was 4.7 per cent six months ago and the 20 year average is 8.2 per cent.

“The vacant space aggregates to just 6116 sq m enabling the accommodation of up to 500 staff, less than 1 per cent of the current office workforce.”

Dibble says the drive for space is not isolated to the prime sector. “The secondary market continues to show further reductions in vacant space, now at 11.5 per cent compared with the long term average of 13 per cent.

“The overall vacancy rate has reduced from 9.4 per cent in December 2013 to 8.2 per cent in June 2014 with the long term average at 11.8 per cent.”

This overall vacancy rate is the third lowest in the past 20 years. In June 2008 it reached 7 per cent and in December 2008 it was 7.7 per cent.

Buoyancy in the leasing market and demand levels at record highs has resulted in investor confidence for office buildings in Auckland still being the highest out of all sectors and locations in New Zealand, Dibble says.

“Colliers International’s latest investor confidence survey shows office investors in Auckland were at a net 64 per cent positive in the September 2014 quarter.”

He believes that, while investors are keen to capture the increase in returns on offer from CBD office premises, they are also mindful of the increase in interest rates that is approaching. “This is making them cautious, but still active in a sector sparse with quality options.”

The new Colliers’ report says a flurry of office property transacted over the first half of 2014 (subject to Overseas Investment Office approval) will boost total transaction numbers and aggregate values to near record highs.

“Given cap rates in both the retail and industrial market are at record low rates, the office market still has some room to firm to record lows. The 20 basis point firming over the last six months for average prime investment yields will likely be surpassed in the next 12 months given the transaction activity currently underway.”

However, Dibble says the increase in activity is not an indication that the market is reaching its peak. “Pent up demand remains and many of the purchases announced have been as a result of investors repositioning their portfolios and recycling funds into other opportunities - encouraged by New Zealand’s growth in economic conditions which are at odds with most markets within OECD countries.”

He says the demand for city office space has seen the growth of the “supply pipeline” with speculatively built premises currently under construction in Victoria Street West and Gaunt St; and Precinct Properties’ Downtown Shopping Centre redevelopment.

“Tenants moving to these premises, along with Fonterra moving to its new headquarters in Fanshawe Street, will provide more opportunities as tenants relocate. Pockets of flexible space at the Lysaght Building and Precinct Properties’ developments in the innovation precinct at Wynyard Quarter will help alleviate the shortage of space requirements for technology and innovation focused tenants in the near future, while creating a new destination hub for this specialised sector.”