Auckland is New Zealand’s largest city and region with a population of 1.64 million and is home to approximately one third of the country’s population. As of the 2018 census, 41.6% of Auckland’s population were born overseas, predominantly in Asia, the Pacific Islands, and the United Kingdom. Immigration to New Zealand is concentrated in Auckland due to better economic opportunities, established ethnic enclaves, and accessibility to international travel and is expected to characterise two-thirds of Auckland’s future growth, which is predicted to reach two million by 2033.
Auckland is the economic and financial centre of New Zealand and accounts for 38.1% of the country’s GDP, while being considered a Beta+ world city because of its contribution to commerce, education, and the arts. The professional, scientific, and technical services industry employs 12.1% of the city’s working residents and accounts for 10% of Auckland’s GDP, followed by manufacturing at 9.4% and financial and insurance services at 9.0%. Additionally, the Ports of Auckland, New Zealand’s second largest after Tauranga, is estimated to generate $15 billion of the country’s GDP and provides around 180,000 jobs both directly and indirectly.
The city’s presence as an innovation hub in the Asia-Pacific region has seen the proliferation of over 30,000 sqm of coworking space in Auckland in the last four years, including GridAKL in Wynyard Quarter. It is expected that by 2020, the wider innovation precincts will contribute $450 million annually to Auckland’s economy.
Premium office space in Auckland’s CBD is primarily located around lower Queen St and the waterfront, and is typically occupied by professional and financial service providers. Meanwhile, the largest industrial areas are situated in Onehunga, East Tamaki, and Manukau, but with recent industrial development on the urban fringe, growing business parks have emerged in Westgate and Drury South. Auckland’s commercial property sector observes substantial demand and the city’s economy is supported by significant interest in construction and real estate investment.
Office leasing trends in Auckland
As per our latest vacancy survey, prime vacancy (comprising Premium and A-grade accommodation) has surged to 7.3%, a rate that has not been as high since 2011. Yet this overall figure conceals the uneven spread of vacancies across the CBD on a building-by-building basis, given that ~50% of total prime vacancy can be attributed to five buildings alone. The performance of other prime assets has therefore been diluted in the overall figures.
Notwithstanding the above, we believe that the market remains divergent between upper and lower quality spaces. Among Auckland office, the occupier preference for prime space over secondary is exemplified by an almost 7% difference in vacancy levels. This relationship is further complicated by an availability of sublease spaces and challenges with finding eligible tenants. At the same time, sublease space is translating into new direct leases where agreement can be reached. Flexible workplace strategies continue to redefine the role of the office post-COVID, and with OPEX facing upwards pressure due to labour costs, space needs are being addressed on an individual business level.
Despite the overall decline in total office stock, we recorded some noteworthy completions in the last 12 months including Precinct Properties’ Commercial Bay, One55 Fanshawe, 10 Madden, and Alberts on 1 Albert Street. Further completions are also anticipated for year end, which include 136 Fanshawe and 48 Greys Avenue.
Meanwhile, various medium-term projects have begun to move through the development stages illustrating revived developer interest post-COVID. Notable projects in the pipeline include 1 Mills lane (25,0000 sqm A-grade space currently under construction with estimated completion in 2025) and 3-15 Albert (15,000 sqm Premium office space resumed in planning). Similarly, Precinct also put One Queen Street (a mixed use hotel/office development) back on the table announcing construction will begin shortly with estimated completion date of late 2023. Other notable projects in the pipeline include 35 Graham Street (24,000 sqm refurbishment, in planning), 87 Alberts (14,500 sqm refurbishment, in planning) and the final stage of Precinct Wynyard Quarter innovation precinct (~18,000 sqm across three buildings, in planning). Together, these projects will deliver a substantial amount of office space into the CBD which we expect would foster further challenges for existing landlords.
While a lack of leasing evidence sees prime and B-grade office rents hold flat over recent quarters, there has been some rental movement on a building-by-building basis. A ‘flight to quality’ scenario continues to effect large vacancies among lower grade stock and a persistent softening of rents. Anecdotally, landlords are either looking for alternative uses for secondary space or leaving the stock empty, and when compared to forecasts for prime office space, they maintain larger incentives and recover significantly slower.
Similarly, yields have held relatively firm over the year having compressed during the initial lockdown period. Looking forward, while investment decisions will continue to be made on a building-by-building and case-by-case basis, we anticipate yields to remain stable in the short term supported by ongoing investor interest to NZ market due to its transparency, long-term economic fundamentals and stable returns.
|Office Stock (sqm)||615,806||614,589||↓ -0.20%||↓|
|Vacancy||4.84%||7.30%||↑ 246 bps||↑|
|Net Face Rents (NZD per sqm p.a.)||$518||$516||↓ -0.51%||↓|
|Yields||4.94%||4.69%||↓ -25 bps||↓|
|Office Stock (sqm)||1,253,808||1,239,267||↓ -1.16%||↓|
|Vacancy||8.06%||10.64%||↑ 258 bps||↑|