KEY POINTS:
Vacancy levels in Auckland's city fringe office sector are at a 10-year low, according to Bayleys Research's latest survey overview of the market.
Continued development activity has increased the net lettable office space in the precinct which encompasses Parnell, Grafton, Newmarket, College Hill and Newton by about 9500sq m over the past 12 months to just under 510,000sq m the survey reveals.
However, leasing uptake has outstripped the new supply of space and pushed the vacancy rate to an historic low of 8 per cent.
"As is characteristic of other office markets in Auckland and around New Zealand, the development of quality office space over the last year has attracted several quality tenants to the area," says Gerald Rundle, manager of Bayleys Research.
Just under 60 per cent of the total 11,000sq m of space absorbed in the city fringe since the last survey at the beginning of last year has been A-grade offices.
Rundle says the city fringe precinct is popular with employers as adjacent residential suburbs provide a large pool of employees and the areas are close to facilities and amenities for a quality working environment.
The advantages of operating a business in the city fringe include: generally lower total occupancy costs relative to the CBD, car parking at lower rates, quick and ready access to main arterial routes and motorways.
The lower overall vacancy rate is a result of strong leasing activity across all grades of property, with the exception of D-grade space, says Rundle.
"Analysis of market dynamics in the city fringe show that A-grade space is tightly held, with only small pockets available. It is expected that the strong levels of absorption experienced in recent years will continue."
Chris Urry, Bayleys corporate leasing manager, says an aspect of the leasing market which is becoming more noticeable is the limited amount of available space in higher quality buildings which is forcing tenants to accept lower quality office accommodation.
"This is good for owners of B-grade and C-grade office accommodation, with some who have not been able to lease their space for considerable time, now being able to find tenants," he says. B-grade and C-grade vacancies have both decreased over the last 12 months in the city fringe, with a 1.6 per cent and 1.1 per cent point drop in vacancy rates respectively.
"While owners of this lower quality space are finding tenants, the preference for quality space is having an important impact," says Urry.
"Owners of lower quality space are realising that they need to either refurbish to maximise the potential of the building and attract higher rents or offer refurbishment as an incentive to retain existing tenants."
The College Hill precinct provides just under 140,000sq m of net lettable area making it the largest precinct monitored in the city fringe by Bayleys Research.
The vacancy rate has been relatively fluid, with large increases and decreases in occupancy over the last few years. The latest vacancy rate is down 2.4 percentage points to 6.5 per cent as a result of around 6000sq m of net absorption.
While a majority of this absorption was of B-grade space, this resulted from no A-grade space in the precinct being available despite this top category of office space representing just under 40 per cent of the total net lettable area.
Newmarket is a similar sized precinct to College Hill and continues to attract high profile tenants because of its closeness to the city, but without Auckland CBD's higher rents, and easy access to main arterial motorways,
The fashionable and exclusive feel of the area, offering quality shopping and a variety of good cafes and restaurants, makes it a popular working environment.
Newmarket's vacancy rate has increased from 6 per cent to 6.9 per cent since the beginning of last year, largely because of the result of the recent completion of 435 Khyber Pass Rd adding about 3000sq m of A-grade space.
However, most floors of this building are already tenanted, with only the vacant first floor contributing to the overall increase in the vacancy rate.
Bayleys Research says lower grade buildings in Newmarket will also continue to be upgraded as the demand for A-grade space remains high.
Neighbouring Parnell has experienced a decrease in its vacancy rate in the last 12 months from 12.5 per cent to 10.3 per cent.
The Parnell precinct has benefited significantly from upgrades to infrastructure and office accommodation exemplified by the refurbishment of the Kodak Building and the historic Heards Building, which is offering apartments as well as office space of just over 2000sq m. Infrastructure also continues to be upgraded with the redevelopment of Heard Park and surrounding footpaths next to the Heards building in Parnell Rd.
A-grade space in Parnell continues to be tightly held with no vacancies. The majority of net rents for good quality space (A-grade) now range between $250 to $300 per sq/m with reports of some space achieving $330 per sq/m. Average quality space (B and C-grade) is now around $180 to $210 per sq/m.
Development in the area continues with the four-storey B28-30 building in Balfour Rd set to provide a further 4000sq m of A-grade space while the Carlaw Park redevelopment will provide extra office space of approximately 10,000sq m.
The vacancy rate in Grafton has been relatively stable at around 13 per cent for the last two years.
Just under 90 per cent of the 98,000sq m total of net lettable area in the precinct is B and C-grade space. Refurbishment is the major focus of current owners who are looking to attract and retain tenants as well as get higher rents for an area generally associated with lower grade buildings.
Newtown continues to provide the lowest vacancy rate at 4 per cent, of all five city fringe precincts monitored by Bayleys Research.
While this indicates a slight increase in vacancy rate since the 3 per cent recorded in last year's survey, the vacant space has only increased by about 750sq m and it seems much of this space will be tenanted shortly.
INNOVATIVE DESIGN PROVIDES LIFESTYLE BENEFITS
Typical of some of the high-quality, innovative new buildings appearing on the city fringe is this three-level mixed-used office and apartment building in Park Rd, Grafton.
Designed by Bailey Architects, the five-year-old building won a NZIA Resene Auckland branch award in 2006. The 343sq m premises are split between a west wing office building and an east wing apartment. The east side also has a roof deck and enclosed outdoor area.
Mark Habel, who is marketing the property with Bayleys' colleague Clint Barber, says its flexible design allows for different work/life configurations.
The building is on a 255sq m site and is for sale by private treaty in Bayleys latest Total Property portfolio.
