Steady as she goes on the North Shore

As land values escalated, a slow-down in development helped cap commercial and industrial vacancy rates. Photo / Supplied

The North Shore's commercial and industrial vacancy rates, which have increased over recent years across all sectors of the market, now appear to have stabilised as development and leasing activity has come into line, according to an overview of the market undertaken by Bayleys Research.

"Overall, office vacancy on the North Shore has remained steady despite the tough economic conditions which have affected other areas," says Gerald Rundle, manager of Bayleys Research.

Office vacancy is at 13.3 per cent in the latest survey, up only slightly on the 13 per cent recorded last year.

"Vacancy levels in Browns Bay and Wairau Valley are similar to the last survey with the Mairangi Bay, Albany and Rosedale office precincts experiencing a decrease in vacancy rates," Rundle says. "These areas are characterised by low-rise office complexes and, while a proportion of these remain unlet, the vacancy levels have decreased steadily since the 2009 survey mainly due to a variety of smaller tenants moving into these areas."

Takapuna and Akoranga/Northcote are the only two precincts which experienced any rise in vacancy levels.

The Akoranga/Northcote area experienced only a minor increase from 7.5 per cent to 7.8 per cent, and the only real vacancy rise occurred in Takapuna, with an increase of three percentage points to a 12 per cent vacancy.

B-grade space had the greatest rise thanks to the AMI building at 521 Lake Rd being completely vacant at the time of surveying.

"The slowdown in development activity witnessed over the last two years has helped cap North Shore commercial and industrial vacancy rates," says Rundle. Between January 2004 and January 2008, the North Shore's office inventory grew by 71,250sq m, reaching a total of approximately 326,000sq m.

"This rapid expansion was driven by increased tenant demand resulting from high levels of business formation and expansion mid-decade and changing land-use patterns," says Rundle. "A shortage of development land saw land values escalating, making industrial development in many precincts financially unviable. Developers therefore had to seek a higher value end-use product, with offices or retail the main options."

Despite the addition of a significant amount of floor space, the overall vacancy rate fell from 10.8 per cent at the start of 2003 to 9.1 per cent in early 2007.

"The latter part of 2007, however, saw the economy sliding into recession and many companies changed their priority from expansion to survival with many looking to shed unneeded space," says Rundle. At that time, there was still a considerable amount of new space under development, which resulted in approximately 35,000sq m being added to the total inventory by the start of last year. This combination of events pushed the vacancy rate up sharply to stand at 13 per cent in early 2009.

As projects were completed, however, development activity was put on hold as a consequence of greatly reduced occupier demand and the fact that development funding became increasingly difficult to source.

"In the year to January 2010, the total inventory available to the market has actually shrunk as a result of refurbishment programmes to upgrade premises, with the total office floor space now sitting at 336,375sq m," Rundle says.

"With the economy improving but development activity still muted, it is likely that the office vacancy rate will begin to fall again in the short to medium term. This is already happening in the North Shore's industrial sector, which has followed similar trends to the office market."

Between 2001 and 2008, new construction resulted in an annual average of 56,500sq m of industrial floor space being added to the region's inventory. While the vacancy rate during this period fluctuated on an annual basis, it had by last year reached 9.7 per cent from 3.5 per cent in 2004.

Once again, the trend of increasing vacancy resulted in a reduced appetite for development. Between 2008 and 2009, total industrial floor space increased by 27,100sq m, less than half the average recorded over the previous seven years. In the year to January, only 1000sq m of new space was added to the inventory.

"This reduction in development has impacted on vacancy which, combined with a pick-up in leasing activity, has resulted in a reduction in the overall industrial vacancy rate to 8.6 per cent. Once again, development activity throughout 2010 is likely to continue to be subdued and, as the economy improves, a growing appetite for space will continue to put downward pressure on the industrial vacancy rate."