KEY POINTS:
A chronic shortage of office space in premium and A-grade buildings is pushing rents up and in some cases is forcing landlords to put money on the table to buy out leases so existing tenants can expand.
Vacancy rates are at less than 1 per cent across Auckland's top 12 buildings and in the three premium grade buildings there is zero vacancy.
"Office space is so tight, a tenant wanting 2000 sq m of contiguous space in an A grade building has only one property available," says Colliers International commercial leasing manager James MacCormick.
"Auckland's office market is dominated by exceedingly strong demand and rapidly contracting vacancy rates. There will be little relief from the limited amount of new space coming on to the market until 2009," he says.
"About 70,000 sq m of new office space is due for completion in the next three years.
"More than 75 per cent of that space has already been taken and deals being done today are for new developments that, in some cases, will not be completed for five years."
MacCormick says 2008 will be a year of pain for tenants who have not addressed their lease expirations.
"Tenants who don't have rights of renewal in their leases will be faced with moving to possibly inferior premises, as existing larger tenants needing expansion space will be given first option by landlords."
One of the city's biggest landlords AMP New Zealand Office Trust (ANZO) has less than 1 per cent vacancy across its 120,000 sq m of office space and Multiplex has less than half a per cent.
"It's the lowest vacancy rate we have ever had across our portfolio," says Peter Wall, Multiplex New Zealand managing director.
Compounding matters, says Wall, is the lack of new space coming on to the market in the next couple of years and more significantly the expansion of existing businesses and their desire to upgrade.
Wall says the tight office market has left tenants with few alternatives at a time when there is confidence in the economy, job security, a head office drift north and companies expanding rather than new players coming into the market.
"Multiplex, in extreme cases, has been forced to put money on the table to buy out an existing lease to accommodate the expansion of a tenant. Its not something we like to do but its becoming necessary, although we do try to shuffle tenants within our portfolio if possible.
"Generally the tenants we ask to take an early lease expiry were going to move."
ANZO asset manager Hamish McCulloch says the trust is continually talking to its tenants about their business needs.
"With a large portfolio such as ours there are usually opportunities for expansion or movement within it although it is becoming tighter."
Colliers International commercial leasing director Rob Bird says the dearth of office space has made the renegotiation of existing leases even more important.
Law firm Meredith Connell, a CBD tenant over three floors at Forsyth Barr Tower in Shortland St, a building in Capital Properties portfolio (a wholly owned subsidiary of AMP Property Portfolio) is a company which saw its business grow with a need to expand.
Colliers International's leasing team helped relocate another existing tenant Vending Technologies and that allowed Capital Properties to offer Meredith Connell expansion space.
The leasing team also put in place a new lease for Oracle over 2000 sq m it occupies at Oracle Tower in Wakefield St that kicks in after the company completes its original lease at the end of the year.
Oracle had been considering moving to the waterfront, says Nick Cobham, Capital Properties former Auckland manager.
With some added value from Colliers leasing team, Capital Properties was able to retain Oracle.
Bird and broker Paul Dyson completed one of this year's biggest leases recently when they helped renegotiate a new nine-year lease for Fonterra's 9000 sq m CBD headquarters at Princes St, enabling Capital Properties to buy the building for $38.75 million.
Roger Coles, Fonterra's manager, property, says the company agreed to a new lease because the location suits it.
"The new landlord will undertake significant capital works to upgrade the 12-level building and the lease contains a clause allowing the company to drop off some floors over a designated period.
"If we ever outsource parts of the business or become more efficient the lease gives us the chance to look at dropping unused space, which is sensible in any business arrangement."
Coles says Fonterra moved into the Princes St building about three years ago knowing it leaked and with the expectation it would be fixed, but nothing happened.
He says Fonterra looked at moving but the rental range was favourable compared to paying between $350 per sq m and $450 per sq m for newer premises.
Finding a building to house 800 to 900 staff was also going to be difficult.
Fonterra has a global property portfolio with an insurable value of between $11 billion and $12 billion and farmer shareholders who are cost-focused.
"They are entitled to and should be," says Coles.
Nick Cobham, former Auckland manager of Capital Properties, says teamwork between Fonterra, Colliers International and Capital Properties saw the lease renegotiation turned around in an extremely short timeframe to achieve a successful outcome.
"This business is about attracting tenants but more important is the ability to retain them.
"A lot of that work is achieved through tenant representation; a role that brokers are increasingly required to become more adept at," says Cobham.
Limited new office supply in the short to medium term is also putting pressure on rents.
The top floors in the prime Vero Centre, PricewaterhouseCoopers Tower and Lumley Centre are generating new benchmark net rents of more than $550 per sq m. Rental growth of up to two per cent to three per cent is forecast for the rest of the year.
Colliers International research shows gross rents in The Viaduct of up to $640 per sq m are setting new benchmark levels for the precinct.
The A grade market has experienced significant growth in the past year with rents in the CBD core reaching more than $400 per sq m and they are expected to also climb 2 per cent to 3 per cent over the next six months.
MacCormick says smart tenants whose leases might not be expiring for four to five years will be looking at their options now, given rising rent, the continuing contraction of quality office space and the rush by businesses to pre-commit to new space that is marketed well before it is built.
