Fear of ‘missing out’ hikes office market

2:10 PM Monday July 25, 2016 Colin Taylor

The North Shore has the lowest vacancy office rate at just 4 per cent.

A lack of commercial office property stock and competitive pricing is being fuelled by owner-occupiers, ‘yield-hungry’ investors and syndicators, says a new report published by Colliers International.

Within the publication entitled Auckland Metropolitan Office 2015 - Taking care of businesses, Chris Dibble, Colliers’ director research and consulting, says some investors view the new price levels as “untenable”.

“However, the fear of missing out is promoting greater levels of acceptance, facilitating a new wave of asset appreciation,” Dibble says. 

He says tenant demand for office space is at an eight year high in the area specified as Metropolitan Auckland – stretching from Albany in the north and to Papakura in the south; and from Westgate in the west, to Howick in the east; but excluding the Auckland CBD.

“Recent expectations of interest rates to stay low will see further pressure on purchasers,” Dibble says. 

“The demand has pushed the vacancy rate to six per cent which could have gone lower, reaching critical point like the CBD, had developers not taken care of businesses by building more space to accommodate the demand.

“More supply is on the horizon, which will be of relief to many tenants who readied themselves early to take advantage of the situation. However, not all tenants are in a position to move or drive favourable leasing rates.”

In relation to rents Dibble says average annual increases have risen by a modest three per cent in the prime sector and one per cent in the secondary sectors since 2011.

“With no clear advantage eventuating between landlords and tenants over the medium term in a more balanced environment, rents will not rise at significant rates. Current rents are forecast to increase by three to four per cent per annum in the prime sector and one to two per cent per annum for lower grade premises. This is lower than previous upswing cycles, which reached double digits in some years and locations.”

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There has been a noticeable surge in businesses looking to the Southern Corridor. 

Key findings in the report are:

  1.       Total metropolitan office supply reached more than 1.7 million square metres in 2016 and developers have built 20,300sq m of new space in the past 12 months.
  2.       Vacancy rates in the City Fringe, Southern Corridor, West Auckland and Auckland South are at cyclical lows of 7 per cent, 8 per cent, 6 per cent and 7 per cent respectively. The North Shore has the lowest vacancy office rate at just 4 per cent.
  3.       There is approximately 106,000sq m of available space in the Auckland metropolitan office area excluding the CBD. If all of the space was leasable it could accommodate roughly an additional 5,000 employees (based on our latest workplace research on office density) and would be absorbed in just two years under current employment growth rates.
  4.       120,000sq m of more office space during the next five years is on its way to metropolitan Auckland which will help the sector avoid a critical shortage of non-CBD office supply that would hamper the growth of arguably New Zealand’s major economic employment zone of small to medium sized businesses.
  5.       There is still some way to go before many of the buildings are completed. This may cause some “uncomfortable” positions for tenants in the short-term if inquiries are left too late.
  6.       Only some precincts and tenants will see greater levels of opportunity as developers face the on-going issue of finding suitable land capable of development. If more land was available, it is likely that more supply would be built despite the pressure on feasibility from construction costs.
  7.       There is little evidence to suggest that the metropolitan office sector will deviate from its current growth path. Businesses are moving away from the status quo and are realistic about their future plans, taking on more calculated risks.
  8.       The sound property fundamentals supporting the metropolitan office market have elevated the already high levels of competition among investors, owner-occupiers and syndicators. A new wave of asset appreciation is forecast as conditions continue to promote sales activity.

Matt Lamb, director of commercial leasing for Colliers, says businesses are more confident of taking on more work and profitability rates are improving, increasing the number of businesses searching for space and resurrecting business expansion plans. “This has led to a steady appetite for space across the region, especially for the main metropolitan office hubs supported by decent infrastructure and public transport links,” he says.

“Businesses are moving away from the status quo and are realistic about their future plans, taking on more calculated risks.”

Lamb says the type of tenants commanding rental discounts and incentives are those that are well-known, occupy large areas of space and take long leases – ultimately increasing the covenant and future value of the landlord’s asset. “There are only a few of these types of tenants, but they will be lured into new opportunities. Most favoured are premises that provide better workplace solutions, productivity and the sites that assist in retention and attraction of the best employees.”

Gareth Fraser, director investment sales, says expectations of interest rates staying low are “adding fuel to the fire”. He says investment yields are now reaching new lows and the range and depth of purchasers have kept conditions competitive.

“The difficulty at the moment for prospective purchasers is locating properties to purchase. This has seen competitive pricing when stock does become available. Purchaser inquiry for lower quality premises has increased, especially of properties that could benefit from a refurbishment ahead of the expected rise in popularity and access to the area.

In relation to specific metropolitan precincts:

• North Shore – market conditions remain tight with only 15,000sq m of available office space across the entire North Shore. All three of the sub-precincts are experiencing high levels of demand.

• West AucklandRecent increases in population and billions of dollars being spent on infrastructural projects has spurred occupier interest and development activity in the West where there is about 93,000sq m of commercial office space dotted across the precinct with the major hub in Henderson. Listed sector company Stride Property has boosted the total office space available with Stage 1 complete and Stage 2 at Westgate currently under construction to provide an additional 4200sq m of total space by late 2016. The average West Auckland prime office rent is now at $240 per sq m, well below the average metropolitan office rent of just over $290 per sq m.

• City FringeThere is now only 41,000sq m of office space available in the city fringe from just over 680,000sq m of stock. Vacancy rarely reaches these low levels, with the last time in 2008, when there was around 200,000sq m less total supply. The demand for office space has been increased by the removal of stock for conversion into residential apartments which gives tenants limited options. Prime grade properties are even harder to find for tenants with less than 3500sq m available. Development activity of 40,000sq m of office space in the city fringe will alleviate some of the mounting tenant pressure, but it is likely that the majority of the space will be leased within 24 months under current employment growth forecasts.

• Southern Corridor There has been a noticeable surge in the number of businesses looking to Ellerslie, Greenlane, Mt Wellington and Penrose as a new business base. The rise in the precinct’s amenity, access to public transport, improved car parking ratios and a disparity in rental costs compared to the most popular city fringe areas, has seen the Southern Corridor become more attractive to tenants. Significant leasing inquiry for properties over 500sqm resurfaced in a market which had experienced relatively static movements the previous year, especially for larger premises. This pushed the vacancy rate from 11 per cent in March 2015 to 8 per cent this March.

• Auckland SouthIn the main commercial areas in the south of Auckland – comprising areas such as Manukau, Mt Wellington, East Tamaki and the Airport Corridor – the vacancy rate is just seven per cent. There is about 304,000sq m of combined office stock in the precincts, with only 20,000sq m of vacant space. The demand for quality premises remains high, but approximately 15 per cent of the vacant space in Auckland South is of modern, quality grade space. On the horizon are new premises at the Auckland Airport in a building designated Quad 7 until naming rights are taken which will provide 7975sq m of high quality office space with completion expected by the end of the year. A greater focus and commitment by the Auckland Council and the government on office areas in Manukau, could see a rejuvenation of the area’s popularity. A specific project area of approximately 600 ha has been identified by Panuku Development Auckland. Average prime rents in the South range between $300 and $340 per sq m which have been static over the past 12 months after a lift in rents the previous year. New build rents continue to overshadow those commanded by existing premises with lower quality premises often secured for between $160 per sq m and $250 per sq m.

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(From right to left) Chris Dibble, Matt Lamb, and Gareth Fraser of Colliers International