The overall vacancy rate in the Auckland CBD office market declined further in the first half of 2015 to a historic low of 8.8% in July reflecting some of the tightest market conditions seen in a number of years.
This is a fall of 1.8 percentage points from Bayleys Research’s January survey and is driven mainly by a large decrease in B Grade vacancies as prime (Premium and A Grade) vacancy is already at a very low level and mostly comprises smaller, part-floor tenancies.
Some of the reduction in unoccupied space is due to buildings temporarily being withdrawn from the supply chain for refurbishment. However, there continue to be more businesses leasing or buying premises for occupation in the CBD than are vacating, with a net absorption of 15,134m² of space in the first half of the year.
That reflects continuing growth in New Zealand’s services sector, which accounts for about two thirds of the economy and drives office space absorption. It was at its most buoyant level in 11 months in June, with the BNZ BusinessNZ Performance of Services Index (PSI) rising to its highest point since July 2014 and extending a run of continuous expansion since October 2009. All of the five sub-indices were above the 50 reading that separates contraction from expansion.
Combined with the improved Performance of Manufacturing Index reading for June, the latest PSI paints a picture of an economy continuing to expand robustly, probably a little better than average, says BNZ senior economist Craig Ebert.
However, economists expect New Zealand’s economic growth to slow as the slump in dairy commodity prices weighs on the country’s main exports and earnings. While activity growth is softening, support remains from accommodative monetary conditions with very low interest rates, a declining currency, a strong construction sector pipeline and record high net migration which is helping fuel the services sector and hence the demand for office premises.
Within the Auckland CBD, an increasing amount of that demand is focused on office buildings near the waterfront. The traditional core of the CBD used to run up Queen Street north to south from the harbour to Aotea Square. However, over the past few years development has focused very strongly on the northern sector of the CBD with most of the blue chip tenants now situated in this area where 80% of prime premises are located.
The centre of gravity has moved north and then fanned out to the east and west. Vacancy in the northern waterfront locations has decreased a significant 2.3 percentage points since the start of this year, equalling the lowest vacancy seen in this location since 2009 at 7.1%. Vacancy in the southern precincts, although trending down, is declining at a much slower rate and now sits at just under 12%.
Given the overall reduction in vacancy in the Auckland CBD in the last six months, the pressure on available office space is only going to continue over the remainder of the year as businesses remain in expansion mode.
There is currently around 60,000m² of CBD office accommodation on which construction is underway or soon to commence, with another 30,000m² being refurbished. The NZME building is nearing completion in Victoria Street West, while work is well advanced on Fonterra’s new head office building opposite Victoria Park and a 9,000m² building behind it which is being speculatively developed.
Neighbouirng these developments on the corner of Gaunt Street and Daldy Street, will be another new building scheduled for completion in March 2017 with Datacom to occupy approximately 80% of its 16,735m². Also due for completion around that time is a 10,000m² building at 46 Sale Street.
Further out, Precinct Properties is proposing new office buildings in the Wynyard Quarter and an office tower on the Downtown site, going head to head with Mansons TCLM which is seeking resource consent for a high rise tower on NZME’s current site in Albert Street. Over the last decade Mansons has been the most active developer in the CBD and fringe, building approximately 150,000m² of prime office property mostly on a speculative basis.
There could potentially be a further 170,000m² of new CBD office projects completed over the next five years, providing working space for another 11,000 employees in the inner city which currently has a growing working population of around 100,000.
However, with the next wave of development still in its formative stage, the total office inventory will not expand significantly in the short term. Premium and A Grade office accommodation, for which the current CBD vacancy rate sits at close to 3%, in particular will remain in very tight supply for some considerable time.
There is already evidence of significant upward pressure on rentals for prime space as a consequence, reflected in a net rental of $650/m2 for the top floor of a new CBD building nearing completion. Rentals are likely to keep on rising until the development pipeline increases significantly.