Balance of power swings to landlords

1:45 PM Wednesday June 18, 2014 Colin Taylor

Tenant demand is expected to lift rents by 2.5 per cent this year.

The balance of power between metropolitan office landlords and tenants has clearly swung in favour of the landlords for the first time in the past six years, says a study encompassing more than 1.7 million square metres of Auckland city office space.

The Colliers International research report on the office sector shows that many key property indicators are turning positive and have surpassed the cyclical low of the past few years.

Chris Dibble, national research manager for Colliers, says the Auckland metropolitan office market has been re-ignited this year, entering a phase of higher occupier demand, rising rents and more development.

"Prime rents have predominantly been steady since early 2012, rising by less than 1 per cent per annum," Dibble says. "However, over the past year rents have increased by around 1.2 per cent, now sitting at an average $261 per square metre.

"It is good news for tenants that rents are still below the level seen in early 2008 at the peak of the last cycle but the trend for rents is upward. However, the outlook for the rest of 2014 is for the rise in occupier demand to lift rents further, with an annual rental appreciation of at least 2.5 per cent forecast. Tenants will need to be more discerning in their search and targeted in their approach to limit occupancy costs."

Dibble says expectations of higher profitability are spurring business owners to commit to premises for longer lease terms.

"Sustained periods of high confidence levels from businesses about future activity has led to more decisive action on lease requirements and the rise in activity is noticeable across all tenant sizes," Dibble says. "This has led to a drop in the overall vacancy rate from 11 per cent in the first quarter of 2013 to 9 per cent in the first quarter of 2014. Prime vacancies are down to 6.7 per cent with projections for further reductions."

The report shows the lowest office vacancy rates in Auckland are in the Mt Wellington and Penrose area at 3 per cent, the airport corridor at 4.9 per cent, Takapuna at 5.3 per cent, East Tamaki/Highbrook at 5.6 per cent and the southern corridor at 6.5 per cent.

Sales figures from Colliers show the number and value of transactions for all types of commercial property in the past quarter have increased strongly year on year and some properties are selling very quickly. "For example, a property at 46 Parnell Rd sold in just five days through brokers Andrew Reed and John Green of Colliers. The property comprised two buildings on a 2071sq m site: a six-level office building anchored by tenants Heinz Wattie's and Westpac and a smaller building at the front, occupied by a bar and restaurant."

In the city fringe some high-profile office developments have been sold, totalling more than $200 million. These include Watercare Services, Oracle House, Courier Post House and the GHD Centre, all of which involved Mansons TCLM.

Dibble says tenant demand for prime CBD space is overflowing into the city fringe and suburban markets. "Tenants who are unwilling to forego the level of quality they desire can be persuaded to rent outside the CBD on the benefits of potentially cheaper rent, easy access and superior car parking ratios "Office development activity has added about 25,500sq m of supply in the past year, on top of the 33,000sq m of new space built in 2012."

But the higher demand has led to rental appreciation. Rob Bird, national director for office leasing, says there is strong demand for moves to well-located, modern offices with large floor plates which improve workflow.

Dibble says that for investors the strong tenant demand provides a favourable outlook for 2014. "Higher net income achieved will be attractive and high quality premises will be in demand. The scarcity of quality stock will keep the pressure on yields to remain firm despite the higher interest rate outlook."