Published 15 November 2011
Net commercial property absorption has been positive this year, led by the cbd office sector, but rental trends have varied across the sectors. Now CBRE research director Zoltan Moricz is suggesting in the consultancy’s latest market review that earlier assumptions for demand drivers, and thus net absorption & vacancy, may prove optimistic for the rest of 2011 & 2012.
“Auckland’s property market indicators tended to improve over the past few months and the general feeling of cautious positivity continued to prevail in an increasingly gloomy global context. This has been assisted by Auckland’s economic growth being ahead of the national trend since the country initially emerged from recession.
“Net absorption has been positive at the broad sector level this year. The recovery has been strongest for offices, led by the cbd. In the non-cbd office market, despite some larger relocations to the cbd there has been sufficient leasing activity to compensate for these losses.
“For industrial, positive net absorption has continued due to take-up of both new supply & existing vacancy and the same is true for retail.
“However, in comparison to offices, both industrial &, especially, retail were fairly moderate in the size of their rebound relative to the overall size of these market sectors. With a moderate amount of new supply completions, positive net absorption led to improving vacancies in the first half of the year.”
Mr Moricz said the international downside risks were real & substantial, “but perhaps a balanced assessment is that the supportive factors behind New Zealand should help it outperform the global economy, but with lower growth than projections & sentiment indicated earlier in the year. Adopting this as the base economic scenario suggests that earlier assumptions for demand drivers and thus net absorption & vacancy may prove optimistic for the rest of 2011 & 2012.
“This will likely reflect a more cautious property market, with lower levels of occupier activity and a longer decision-making process, especially for companies where major decisions are approved offshore. Reduced activity levels will also weigh on market sentiment, with lessors likely to be less confident of finding tenants to fill any actual or potential vacancies.”
Mr Moricz said projected levels of occupier demand had been lowered, but supply would also be below historic averages over the next few years.
“In the cbd office market, about 35,000m² of new space will be completed to the end of 2013 and, in our view, demand will be sufficient to offset this and result in improving vacancies, although with some periodic fluctuations following new building completions.
“While the industrial rental rebound appears to have stalled in the third quarter, the general outlook for the industrial market remains favourable. Spare capacity for industrial occupiers has recovered to historic averages, indicating that continued economic growth will result in improving demand. Forthcoming new supply will have some negative vacancy impacts on existing premises, but vacancy forecasts show an overall downward trend.
“There is also life in the retail property market, although performance differences are pronounced between individual retailers & retail centres/locations. These differentials will strengthen, given the likely supply pipeline & its redistributive effect on retail spend.
“The continued recovery of property fundamentals should underpin the investment market, although the future trajectory of interest rates and any impact global developments may have on international credit markets will have a bearing. On balance, we believe that investment activity will return to longer-term averages from its recent lows and will be supportive of moderate, although sectorally varied, pricing improvements.”
Mr Moricz said rental trends had been more varied in the third quarter. Office rents stabilised early in the year, followed by reductions in incentives, resulting in higher net effective rents. Retail rents increased in dominant centres & strips, although they fell in some underperforming locations.
“The industrial sector has been more subdued and, partly due to increased competition in the development market, prime rental growth appears to have stalled.
“The investment market has been patchy. In some sectors there has been a pick-up in activity and some improvement in pricing. Offsetting this, some broker feedback also indicates a continuation of flat market conditions with a sizeable gap between vendor & purchaser expectations still to be bridged.”
In the office sector, a net 37,231m² of A grade space was absorbed in the first half of the year, including 31,500m² in the East Building in Britomart. As part of that Britomart gain, Westpac’s exit from 6800m² of the PWC Tower was also the main factor in reducing premium grade absorption.
In another grade change, the Media Design School moved out of 1800m² at 242 Queen St, contributing to negative net C grade absorption of 3380m², but moved into 4300m² of vacant space at 92 Albert St, turning B grade absorption positive by a net 3982m².
Mr Moricz said the overall Auckland cbd office vacancy rate was 13.8% (187,765m²) at June, down 0.5% (1896m²) from December. Prime (premium & A grade) vacancy declined from 9.1% to 8.6%, mostly due to the take-up of 6300m² in Zurich House (21 Queen St) and 4600m² at 28 Wyndham St.
Vacancy increased in the PWC Tower when Westpac vacated its 6800m² and at 41 Shortland St, where Ernst & Young vacated 6500m², both going to Britomart. Secondary vacancy (B, C & D grades) decreased by about 1800m² over the 6 months.
Net effective rents started softening in 2008, but Mr Moricz said that had stopped and rents had improved in both the second & third quarters: “Over the past 12 months, net effective rents have increased 1.8% for prime, while secondary has increased 2.7%. Net effective rents are at an indicative $279/m² for prime space and $156/m² for secondary. This is mainly due to incentives that decreased in the second & third quarters of the year.”
Mr Moricz said incentives had dropped to 15.1 months’ rent on a 9-year lease for prime and 14.8 months on a 6-year lease for secondary.
He said both prime & secondary office yields had firmed slightly in the second & third quarters – prime by 5 basis points to 8.8%. Secondary had improved this year, but were still 9 points below a year ago at 10.09%. That left prime yields 182 points off the June 2007 peak and secondary 199 points off.
There were no major office sales, but Mr Moricz said the cbd office investment market had still been reasonably active as a number of medium-sized secondary properties were sold to a mixture of on- & offshore private purchasers. One of the larger transactions was the former Ports of Ackland and St Laurence building at the start of Princes Wharf (139 Quay St), sold to an Asian investor for $34 million at an initial yield of 9.54%, partially vacant and with a weighted average lease term of 6 years.
Mr Moricz said industrial vacancy continued to decline, reaching 4.4% (499,000m²), down from 4.5% in December, through a combination of lower supply & increasing demand. Net new supply in the first half totalled only 31,000m². 18,000m² was taken out of stock to be refurbished for PMP in Enterprise Park, Wiri.
He said owner-occupiers had been driving industrial land values. After large falls in 2008, there’d been gradual growth since the end of 2009 and indicative values reached $348/m² in the September quarter – still 18% below the $424/m² March 2008 peak.
“Owner-occupiers are more willing to meet vendor expectations as they don’t have to factor a development margin into their purchase price. Hence values have been pushed upwards. Those developers/land bankers who are in the market for land have mainly been interested in development sites which have additional secure holding income over the short term while they attempt to secure a tenant. With development still continuing to be slow, the take-up of vacant industrial land has been subdued, averaging 30ha/year over the past 3 years compared to around 110ha/year during 2006-08.”
Mr Moricz said prime industrial rents had adjusted downward after growth over the past year, because of the global economic slowdown and increased concerns around future prospects, which seemed to have had a greater impact on large corporate industrial occupier activity & sentiment than for other sectors
“In addition, the development market for new design-build premises has intensified among larger developers and, as a result, rentals for recent design-builds have also been arguably lower than otherwise could have been achieved. Net effective rents for prime are at a blended office & warehouse rate of $108/m² and secondary at $69/m². Incentives on a prime industrial building sit at an indicative 6.4 months on a 9-year lease and 8 months on a 6-year lease for secondary.”
Mr Moricz said the investment market had become more active, with interest from institutions & overseas high-net-worth individuals. “There also appears to be a shift in motivations & sentiment. Some vendors have taken the position of looking at selling low-risk prime investments which at the present time will achieve a maximum price, and looking at reinvesting funds into higher returning/higher risk properties/projects.
“Brokers have indicated there are a number of properties in the $5-10 million price bracket under contract at present, which should see an increase in transaction volumes in the second half of the year. Reflecting the improvement to activity & sentiment, it appears some of the risk premium that has applied to secondary industrial property over the past 3 years is starting to unwind somewhat. We have assessed secondary yields at an indicative 10.07% in the third quarter, down from 10.13%.”
Auckland retail sales rose 5.7% ($1.2 billion) to $22.3 billion in the year to June, led by electrical & electronic goods, supermarket & grocery stores and food & beverage services, but demand continued to be patchy.
“In the cbd, the bulk of retailer inquiry over the past quarter has mainly come from international luxury brands and local food & beverage franchises. In Newmarket, inquiry for space along the Broadway strip has picked up with interest from both overseas & national chains> However, secondary locations like Nuffield St continue to struggle with new vacancies appearing.”
Rents in catchment-dominant shopping centres had firmed steadily this year – regional shopping centres by an indicative 4.1% to $952/m², large-format by 2% to $229/m². “In comparison, in centres more exposed to competitive pressure such as many district shopping centres, rents showed only a slight increase of 0.4% over the same period, realising a rate of $420/m². Prime cbd strip retail rents have remained relatively stable over the past year, but have shown some growth over the September quarter, with several rent reviews along Queen St indicating a market movement. Current indicative rents for prime cbd strip retail are $2410/m², ranging between $1700-3250/m², representing an increase of 1.7% since the September quarter last year.”
CBRE’s estimate of indicative market yields indicated the continued firming of large dominant-centre yields over the past year, due to the scarcity of these investments and the demand for them, as they continue to trade well and have good long-term prospects. Indicative yield movements over the past year ranged from a 13 basis point firming for regional to 7.84% and & 21 points for large-format retail, to 8.42%.
“On an annual basis, district centres were the only submarket to show an overall softening of yields – 22 basis points to 9.72%. This is because the smaller-sized district shopping centres have continued to struggle in competition with the larger centres. Also, in some cases, many of these centres are ageing and not as attractive as the more modern centres.”
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