Rising demand rejuvenates Metropolitan office market

Higher occupier demand, rising rents and more new office developments are re-igniting the Auckland metropolitan office market.

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

This signals the market has entered into a new phase in the property cycle with the balance of power between landlords and tenants clearly swinging in favour of the landlords for the first time in the last six years.

High expectations

Expectations of higher profitability have spurred business owners to commit to premises for longer lease terms, particularly modern, high quality space well suited to their needs.

Sustained periods of high confidence levels from businesses about future activity have led to action that is more decisive on lease requirements.

This has led to a drop in the overall vacancy rate from 11% in the first quarter of 2013 to 9% in the first quarter of 2014. Prime vacancies are down to 6.7% with projections for further reductions.

The Report shows that the lowest office vacancy rates in Auckland are in Mt Wellington, Penrose (3%), Airport Corridor (4.9%), Takapuna (5.3%), East Tamaki, Highbrook (5.6%) and Southern Corridor (6.5%).

Metropolitan market

The wider metropolitan office market is also benefitting from the rise in tenant demand for Prime Central Business District (CBD) space. Given the shortage of supply available in the CBD, tenants are being lured further afield.

Tenant demand for prime CBD space is overflowing into the fringe CBD 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.

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

Good news

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.

The outlook for the rest of 2014 is the rise in occupier demand will lift rents further, with an annual rental appreciation of at least 2.5% forecast.

Tenants should be more discerning in their search and targeted in their approach to limit occupancy costs. Increasingly, we will see businesses are focused on getting the best value from their occupation and investment decisions.

Consolidating move

Two recent leasing deals conducted by Colliers illustrate the way businesses are achieving this. Rob Bird, National Director for Office Leasing, said that Kordia recently leased 1700 sq m on Level 3 at Oracle House, 162 Victoria Street.

The move allowed them to consolidate their staff onto one large floor plate compared to four floors in their previous premises, which was an older building in Newmarket.

“In the same building, we also assisted Baycorp in their move from an older building in the Hopetoun and K Road area, where they were spread out across three floors totalling 2500 sq m, to a single floor at Oracle House covering 1600 sq m. Because the floor plate was more efficient for their needs, they required less space,” Mr Bird said.

In both cases, these businesses upgraded the quality of their premises substantially and moved to better location and minimal change in their outgoings due to increased efficiency. There is strong demand for well-located, modern offices with large floor plates, which improves the workflow and increases collaboration among the staff.

The Colliers International study encompasses more than 1.7 million sq m of office space across Auckland.

Chris Dibble is National Research Manager, Colliers International based in Auckland

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