Tenants opt for city's prime spots

Vacancy rates are as low as 1.6 per cent in the most popular waterfront areas. Photo / Doug Sherring

Waterfront is drawcard as optimism grows

Tenant preference for prime office space is becoming more pronounced and is reflected in a widening gap between prime and secondary vacancy rates, the latest survey of Auckland's CBD office market by Bayleys Research has found.

The survey, conducted last month, shows the CBD's prime office vacancy rate is at 7.8 per cent - down from 8.5 per cent in the January survey.

The manager of Bayleys Research, Gerald Rundle, says the vacancy rate for prime quality property - premium and A grade buildings - has been reducing since the beginning of last year when 11.6 per cent of the top end office space was available for lease.

But the vacancy rate for lower grade space has been increasing. Rundle says that, after two years of insignificant fluctuations, secondary office vacancy has increased over the past year, and 15.6 per cent of B and C grade space is now vacant.

He says there are several reasons for the shift in preference to top quality space.

"The most prevalent driving force, especially for large corporate tenants, is the seismic stability of buildings. Higher grade buildings, or those that have recently been refurbished, generally comply with or exceed earthquake building standard requirements.

"Another major influence on the increasing divide between prime and secondary office vacancy is the improving confidence in Auckland's economy.

"As the economic recovery in Auckland and the country as a whole has gradually developed momentum, tenants have become more willing to make long term commitments to top quality space."

The CBD's northern precincts and particularly those near the waterfront continue to be favoured by tenants as reflected by low, and mostly falling, vacancy levels, says Rundle.

Vacancy rates in the Western Reclamation, Viaduct and Britomart areas were 3 per cent, 6.5 per cent and 1.6 per cent respectively in the Bayleys survey.

In the more southern precincts of Upper Queen and Peripheral, Midtown and Symonds St Ridge, vacancy rates range from 9.3 per cent to 17.5 per cent.

Rundle says a convergence of prime and secondary vacancy that occurred in late 2009 and 2010 coincided with a long construction tail as projects started during the buoyant market of the mid 2000s were completed.

While some of that space had pre-committed tenants, other developments did not. A fall in tenant demand meant prime and secondary vacancies increased, although this was most pronounced for the increased amount of prime space.

Since then, the introduction of new office accommodation has slowed and there has been a significant increase in the net absorption of CBD space of about 166,000sq m over the past 3 years, says Rundle.

The Kiwi Income Property Trust's ASB Wynyard building is the latest addition to the CBD, adding 20,000sq m of fully leased prime grade office space.

"However, the impact of this new space on the market has not been significant as ASB's former headquarters in Wellesley Street will be backfilled by the Auckland Council, which has purchased that building," says Rundle.

Despite a pickup in absorption of close to 20,000sq m over the last six months - after a fall in the second half of last year - the overall Auckland CBD office vacancy rate in the Bayleys survey was 12.6 per cent. This was up from 12 per cent in the survey completed six months previously, with the addition of new or refurbished space eclipsing the level of tenant growth over the same period.