The Problems With Office Space

Published 6 May 2011
Bob Dey report
CB Richard Ellis research director Zoltan Moricz said this week the growing belief that Auckland’s property market was emerging from the downturn – if it hasn’t already done so – was backed up by facts.
He said, in CBRE’s first quarter market outlook, net absorption was positive in 2010 across the office, retail & industrial sectors and leasing activity in early 2011 appeared to be similar to the level at the end of last year. Office absorption was a net 35,000m² after losses of 17,000m² in 2008 and 22,000m² in 2009.
The supply pipeline had been brought under control – by AMP NZ Office Ltd’s success in retaining the ANZ National Bank on Albert St, cancelling the bank’s intention to go to new premises on Customs St East and, in the industrial sector, by the supply of new space being the lowest since 1993.
In addition, rents & yields had stabilised and in some cases improved.
Nevertheless, Mr Moricz said the market wasn’t all positive: “Retailer activity – the first sector to improve last year – has been patchier in the first quarter of 2011, and conditions in some retail precincts such as Newmarket are yet to improve.
“Also, the office supply pipeline, while lower than last year, is largely speculative with little current precommitment aside from ASB (in the Wynyard Quarter).”
Perhaps of greater concern, though, was the pricing gap still existing between buyer & vendor expectations, particularly for secondary stock: “This is likely to continue for some time, given the volume of troubled stock yet to be offered for sale.”
The CBRE research showed prime cbd office vacancy at 9.1%, net rent at $270/m² and the yield average at 8.93%. Secondary office vacancy was 16.9%, net rent averaging $152/m² and the yield 10.13%. The overall vacancy rate was 13.8% (190,000m²), up 1% (20,000m²) from mid-2010.
Mr Moricz said the rental stability this year was in contrast with last year, when rents slid every quarter, especially for prime property. Net effective prime office rents had declined by 4.2% over the past year, and secondary by 2.2%. Incentives were around 17.2 months on a 9-year lease for prime and 15.9 months on a 6-year lease for secondary.
“Over the course of the downturn, prime net effective rents have fallen 27% from their peak, while secondary rents have fallen 29%. The rent stabilisation reflects improving demand & increased confidence by landlords that, while vacancy is high and the leasing market remains competitive, there is leasing activity and the end of the downturn is in sight.”
Prime industrial vacancy was down at 2.7%, net rent $110/m², the yield 8.29%. Secondary industrial’s vacancy was 5.4%, net rent averaging $69/m², the yield the same as secondary office at 10.13%.
In retail, prime cbd rent was at $2400/m² and the yield 6.65%. There was virtually no vacancy in regional shopping centres, where rent averaged $921/m² and the yield was 7.97%.
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