Tenants betting on future office supply risk disappointment

Precinct Property's One Queen Street development.

Despite already being at record lows, the Auckland CBD office vacancy rate was pushed even lower over the past six months from new leasing activity and current tenants expanding into additional space.

With a dearth in availability, this has led some tenants looking to secure new premises waiting in the wings until more opportunities arise gradually over the next few years. However, not all requirements will likely be satisfied, according to latest research from Colliers International.

The vacancy rate is now at 5.0 per cent, representing less than 72,000sq m of office space available to lease in the Auckland CBD – the lowest level since Colliers' records began in the mid-1990s. It is also below the record low achieved in December 2018 when the vacancy rate reached 5.2 per cent.

Chris Dibble, the agency's director of research and communications, says leasing continues to be buoyant for all grades of office space, however, finding enough suitable space for tenants can be a challenge.

"It is quite remarkable how low the vacancy rate has become. The current record low means that in the past 25 years, tenants have always had more options to pursue.

"Given there really are only pockets of vacant space scattered across the city, tenant requirements are not always matchable with available space.

"This has meant tenants with the ability to remain in their current location for now, are waiting until more opportunities arise as new office developments complete and existing space is freed-up after tenants relocate.

"However, there may not be a significant number of options as many of the new developments already have sizeable pre-commitment rates or existing space is being repurposed into other uses," Dibble says.

One of the first major office developments to complete will be Precinct Properties' billion-dollar development – Commercial Bay. However, the 39,000sq m of office space is already over 80 per cent pre-committed, according to company records.

Precinct Properties is also developing around 8,200sq m of space at 10 Madden Street in Wynyard Quarter, with Media Design School securing 60 per cent of the premises. The space they leave behind will be converted into hotel accommodation.

While Bell Gully will be moving into newly redeveloped space at One Queen Street in 2020, around 8,000sq m of existing office space will be repositioned to make way for a new flagship hotel, InterContinental Auckland.

Many current tenants relocating from the One Queen Street redevelopment along with companies located from around the Auckland region will secure back-fill space in Precinct Properties' premises at AMP Centre and PwC Centre at 188 Quay Street.

In Wynyard Quarter, Mansons TCLM's development at 155 Fanshawe Street is on target to complete next year, already with 63 per cent pre-commitment. Large portions of the back-fill space are anecdotally already being negotiated.

The success of this 6-star Green Star rated building has led Mansons TCLM to start development of 136 Fanshawe Street with completion expected in 2021, providing approximately 20,000sq m of available space.

Precinct Properties, perhaps also recognising what seems to be a relatively balanced supply response given the extreme lows in current available space, is also looking to market new office space in the Innovation Precinct in Wynyard Quarter, with availability around two to three years away.

The recent purchase of Auckland Council's 35 Graham Street by Asset Plus has already sparked discussions about the provision of new supply upon council's lease expiry in two years. An additional two to three levels of office space (subject to resource consents) could be pursued to cater to market demand.

Dibble notes that while progress is underway and new options will gradually become available, it doesn't leave many significant opportunities for tenants in the short-term, meaning rents will likely keep rising for now.

"Net face rents will continue to push higher over the next few years led by new-build premium rates that currently range between $575 per sq m and $795 per sq m, with varying levels of incentives to secure the best tenants on the best terms."