KEY POINTS:
A rising amount of floorspace is for lease in Auckland's central-city office sector.
Zoltan Moricz, director of CB Richard Ellis research and consulting, said the city's vacancy rate was up 2 per cent since 2007 and he expects it to continue to rise this year.
In December 2007, Auckland's CBD vacancy rate for prime, B, C and D-grade office buildings hit the lowest point this decade when just 6.1 per cent of stock was vacant.
Now, Moricz said that had risen to 8.3 per cent, equating to just over 100,000sq m of empty office space. Using the calculation of an average 15sq m for every office worker, that amount of empty space would be enough for almost 7000 people. But vacancy factors were a necessary part of the market and tenants will probably benefit from this new phase.
"It's good for tenants but bad for landlords. Tenants have more options," he said, citing the possibility of rent reductions. Moricz has written a research paper which shows how Auckland now has negative net absorption as tenants contract and occupy less space.
This has happened because businesses employ less people or they are folding, he said.
Auckland CBD office net absorption was negative during only five of the past 24 years, he found and it slipped into this relatively rare phase last year which was only the second time this decade.
"There has been a clear correlation between negative absorption and the economic recessions of 1991, 1998 and 2008. In addition, the private education sector downturn in 2003 also resulted in demand turning negative," he wrote.
"Any amount of negative absorption causes pain to those exposed to its effects. However, in the context of the 19 years when net absorption has been positive, the impact of negative absorption since the mid 1980s has been relatively minor on the property market. In total, 700,000sq m of space was absorbed compared to 65,000sq m of negative absorption."
During both previous downturns, the development cycle was in full swing with substantial amounts of new space being completed. Some 175,000sq m came on the market during 1990-91 and 78,000sq m during 1998 and 1999, he said.
Equilibrium vacancy was sometimes alluded to as a fixed point so that when vacancies rose above this point, rents were supposed to fall and when vacancies fell below the equilibrium point, rents should theoretically rise. In reality, there was no such thing as a fixed equilibrium vacancy, he said.
He illustrated that point by showing how vacancies were around 20 per cent in 1993 when net effective rents bottomed out and started to increase.
"By contrast, during the late 1990s, rents started to fall when vacancies were at 11 per cent. While the ultimate size of the vacancy rate influenced the extent of rental falls and rises, rents responded to the direction and speed of vacancy moves and the strength of demand," he wrote. "There have been various lags between vacancies turning and rents following ranging from 18 months in the early 1990s to six months in the early 2000s."
Auckland developers are busy, completing a large number of new project, he noted.
"The CBD office supply cycle has ramped up in 2008 and has the largest and most sustained pipeline with confirmed additions increasing total stock by around 9 per cent to the end of 2011," Moricz wrote. "Net absorption has already turned negative in 2008 and, given the economic outlook, will most likely remain negative in 2009. As a result, vacancy has increased in all sectors during the past year and will continue increasing this year.
"However, given the importance of supply as the major driver of vacancy increases, the ultimate cyclical vacancy peak will be heavily influenced by the size of the construction pipeline."
The construction pipeline was more moderate than in the late 1980s/early 1990s cycle but it was still sizeable in some sectors.
"Supply in non-CBD offices has been high in 2007 and 2008 and the momentum will sustain through 2009. Confirmed supply will add 5 per cent to stock, but beyond 2009 the pipeline drops significantly. The industrial and retail supply pipelines are on a downward trend following earlier peaks. We expect that around 2 per cent to 3 per cent of the current stock will be added to these markets during 2009 and 2010."
BIG DEALS
* Major Auckland developments on now include:
* 80 Queen St by Brookfield Multiplex.
* Telecom by Manson TCLM, Victoria St.
* Westpac HQ in Britomart by Cooper & Co.
* 21 Queen St by AMP NZ Office Trust.
