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Declining vacancy rates and shrinking levels of existing office space have created a rush of proposals from developers planning to bring more than 250,000sq m of new space to Auckland's metropolitan office market in the next three years, says Colliers International's research director Alan McMahon.
If all proposed developments went ahead it would be enough to more than double the existing stock in the "Southern Corridor" - south of Newmarket and concentrated along Great South Rd.
"But the global credit crunch and the demise of 30 New Zealand finance companies, triggering an unprecedented tightening of available development finance, means many of these projects will be doomed never to leave the drawing board and in our estimation only 80,000sq m of new space is likely to be available," McMahon says.
He says continuing strong demand for good-quality metropolitan office property is driving a dramatic drop in vacancy rates.
Colliers International's latest research in its Auckland Metropolitan Office Market Indicators report shows vacancies across metropolitan office property dropping to a record low of 5.3 per cent after a surge in leasing.
McMahon says rising rents and new developments leased before they are finished are also strong features of the metropolitan office market.
But in these volatile times property investors, in particular, should not assume that just because tenants are paying the rent, they are immune from volatility in terms of value.
It is clear people have been encouraged to put their money into higher-risk investments than was prudent. This is a recurring theme for New Zealand savers and their advisers, who often seem to have trouble distinguishing prime from sub-prime, or blue chip from Blue Chip.
McMahon says nowhere is this more important than in property, where the repricing of risk has seen the value of secondary properties fall. It is not that these properties are underpriced now, it is more that they were overpriced in the last few years as risk assessment was ignored.
As turmoil in the property sector flares, tenants are becoming more cautious, says McMahon. Colliers' recent Retail Market Indicators report has highlighted the difficulties of retailers operating in the household sector. This was reflected in slowing rental growth and a more selective attitude to expansion. This caution has spread to the office sector.
He says tenant caution is hardly surprising given rising business costs, particularly rent. Landlords feeling sorry for themselves might like to reflect that Colliers International's rent indices have shown fantastic growth recently. Rents in Auckland's prime CBD offices have climbed 31 per cent in four years. In Wellington, tenants are paying 44 per cent more than in 2004.
Despite adverse market conditions, fundamentals for the national office sector remain strong. It is outperforming all other property categories.
The Property Council's Investment Performance Index shows annualised returns of 18.3 per cent across all major property sectors for the year to March.
CBD property was led by Wellington at a 23.8 per cent return and Auckland came in at a 20.8 per cent return. Although not quite as spectacular, the Auckland metropolitan office sector put in a steady performance at a 12.5 per cent return. Historically, says McMahon, non-CBD office returns have been less volatile than in the CBD.
There have been some big acquisitions in the metropolitan office market in the past year. Specialist funds management group Orchard Funds Management increased its investment in New Zealand to more than $200 million when it bought the 18ha Eden Business Park in Mt Eden last year for $102.6 million. It proposes to further develop the site and consent has been obtained to develop 14,000sq m.
Development company Finstar has been appointed development manager for the new office building, which will start with 7500sq m Eden 6 followed by Eden 7. Eden 6 is targeting a four-star green rating and is likely to be finished in 2010.
Vacancy rates in Grafton stand at a record low of 6.6 per cent. A large portion of half vacant D grade space in the former Grafton Business Park at 8 Nugent St has been taken off the market as The Neil Group carries out a three-stage redevelopment and refurbishment.
The mixed use 8 on Nugent includes a total of 12,000sq m of A grade office space. Stage one of 6000sq m, also known as Building B, will provide floorplates of up to 1700m. It is due to be finished in the middle of next year. When Building C in stage two is completed, it will provide tenants with the ability to connect to Building B so floorplates of up to 3400m can be created. Both B and C Buildings have been designed to target a minimum four-star green rating. Building A, the third and final stage of the development, incorporates the conversion of the existing building into residential space, which will include 10 penthouses.
In Parnell, several refurbished buildings have come back on to the market, including the Kodak Building and the historic Heards Building. Despite the additional space, vacancy rates continue to drop, reaching 5.2 per cent.
Along the Southern Corridor vacancy levels have edged up slightly to 4.8 per cent after falling to a low of 3.7 per cent late last year. Most of the A grade stock in the precinct is owned and managed by Australian investor Goodman, which began its investment push into the area seven years ago.
With more than $150 million of stock in the area, Goodman has turned its attention to 604 Great South Rd and Building A1, part of a proposed new three-building addition to the 10-building Central Park office complex. The three buildings will be above a two-level podium that will contain carpark and retail space.
Building A1 will provide bigger corporate tenants with flexible floorplate options. The five-storey building is targeting a four-star green rating. Construction on these structures will not start till tenants have been signed up.
On Auckland's North Shore Northbridge Properties has secured Fortune 500 company 3M as tenant for a new development at 94 Apollo Drive in the Interplex business park scheduled for completion in the middle of next year. 3M's marketing and administration arms will occupy 3400sq m of office space over two levels and about 150 carparks. The new building will incorporate environmentally sustainable design features to gain a four-star green rating.
Nearer the city the western fringe has benefited from the CBD's reorientation to more of an east-west axis. Several big developments have been completed in recent years, underlining the area's progress.
Manson TCLM's construction team has made its way from Quay Park precinct, where it recently finished, leased and sold two green-star developments, across town to the former Auckland Mail Service Centre at 167 Victoria St West to start work on Telecom's new $200 million, 30,000sq m headquarters spread across four separate buildings. The development will bring more than 2500 staff across Auckland to one site.
In 2011 Telecom will relocate 1700 staff from six sites to its new 26,000sq m campus-style headquarters at 52 Willis St, Wellington.
