City CBD vacancy at 14pc

Gerald Rundle says construction of new office buildings in Auckland orients towards the waterfront. Photo / Supplied

The "triple whammy" effect of business contraction, the completion of new buildings and the reintroduction of refurbished office buildings has resulted in a significant increase in vacant space in the Auckland CBD and City Fringe office markets, says Bayleys Research in its latest survey.

Reduced business occupation with the resultant empty office floor space has pushed the Auckland CBD vacancy rate to just over 14 per cent from just under 10 per cent at the same time last year, the survey reveals. Similarly, the Auckland City Fringe vacancy rate is up to 13.5 per cent from 7.9 per cent in January 2009.

"After a sustained period of economic prosperity and business growth, it was to be expected that an economic recession was going to have a major impact on office occupation and tenant requirements," says Gerald Rundle, manager of Bayleys Research.

The new survey also shows that the total area of office space in Auckland's CBD reached a new high in January 2010 at just below 1.19 million sq m, while the amount of space occupied fell to 1.02 million sq m from 1.08 million in early 2009.

Further completion of new buildings, especially in Auckland's CBD, and the subsequent relocation of tenants will continue to push up vacancy levels over the next 12 months, says Rundle.

"How high they go will largely be a reflection of the strength of the economic recovery and the resulting growth in businesses, from which flows the demand for office accommodation. Many economic commentators are taking a relatively positive stance on the rate and level of recovery.

"If this growth eventuates and results in businesses absorbing some of the current excess capacity, the final vacancy peak, excluding sub-lease space, may be kept at close to 15 per cent."

Rundle says construction of new and the refurbishment of existing office buildings continues to be orientated to the precincts north of Victoria St towards the waterfront. The completion of the Telecom Building in Victoria St later this year and further development estimated for completion in Britomart in 2011 will add to the Auckland CBD inventory.

While occupancy levels have fallen, the fundamentals of the property market are in far better shape than they were in the early 1990s, which was the last time there was a similar significant downturn in the New Zealand property market marked by Auckland and Wellington office market vacancies soaring to over 30 per cent.

"This recession has witnessed more businesses contracting, and less total failure, meaning that economic recovery is not so reliant on new enterprises growing from nothing."

Furthermore, Rundle says there has not been the amount of speculative development witnessed in the mid to late 1980s - a situation that injected a substantial amount of new building stock, often with little pre-tenant commitment, into the market at a time when business occupancy requirements were in decline.

Two significant prime buildings were completed in the Auckland CBD in the early 1990s with minimal tenant commitment at a time when demand for new offices was non-existent.

"This contrasts with new completions in the current market where the space has been almost 100 per cent pre-committed," says Rundle. "The glut of prime space in the early 1990s saw both prime and secondary vacancy rates at over 30 per cent, whereas today, the prime vacancy sits at 9.75 per cent, although secondary is up at almost 15 per cent."

Business downsizing has resulted in many larger Auckland tenants looking for opportunities to sublease space no longer required for their operations. This space is not captured in the vacancy levels recorded in the Bayleys Research survey because it still has an existing tenancy lease obligation. Rundle says market opinion on the quantity of space that is available for sublease is varied but it is generally agreed to be significant.

"This has resulted in those tenants looking for new space now being placed in the driver's seat with the option of both vacant and sub-lease office space available for consideration. Sitting tenants have also been on the lookout and this has resulted in many landlords working hard to secure their incumbent tenants through numerous means, including incentives and rental reductions, often in exchange for extended lease terms."

While the business focus on cost reductions has meant the emphasis on the quality of accommodation being sidelined to some degree, the quality factor will eventually prevail again, Rundle contends.

"Historic trends show the prime end of the market leads the overall market and, even in the current economic conditions, prime vacancy rates across the Auckland CBD and city fringe are holding up much better than the secondary market. An anticipated improvement in economic conditions and resulting business growth will largely take care of the current prime vacancy and sublease issues over time. However, the ability of the secondary office buildings to recover occupancy will be a challenge for the market."

Apartment conversions and the education sectors have been the historic "release valves" but this time the market trends that will soak up growing B and C grade vacancies are not apparent at this stage, says Rundle.

Apartment conversions have been superseded by new builds and any new apartment developments are on hold in the current market conditions where it is difficult to secure funding.

The education sector at its peak was occupying close to 170,000sq m in the CBD but this has contracted significantly over recent years and the future of this sector is uncertain.