10 November 2015

Time to give up on CBD?

A Lincoln University expert says new figures are making it clearer investing in more central business district (CBD) office space makes no financial sense for developers.

Associate Professor in Property Studies John McDonagh says CBD developers are effectively donating millions of dollars to the city.

“Considering the construction cost, rents and likelihood of no capital gains in the foreseeable future, they should be called philanthropists rather than developers.”
That is why few other developers or overseas investors are lining up to join the party – it does not make financial sense, he adds.

There have already been warnings of an oversupply of office space, a situation which Christchurch experienced before in the early 1990s and took 15 years to recover from. There were many developer casualties as a result.

The new figures released by Colliers late last month show what is under construction now will probably be all that is needed for a long time, he says, stalling further development.

Early developers also had the jump on the rest and have secured the best tenants, reducing the attractiveness of investing further.

“The four big ongoing developments in Cashel Street are pretty much all we will get in the CBD core,” Associate Professor McDonagh says.

He says “anchor” projects are also notable by their absence, and rather than leading and encouraging development may now deserve the alternative definition of “anchor” – in that, with all the procrastination they have held development back.

Leasing up of office space is steady but slowing, “and with other property coming on stream across the river to the west an oversupply of office space is looming”.
“This also does not take into account any fix ups of pre-earthquake buildings adding to supply. This oversupply will curtail any further development, and really start to hit suburban office space rents and vacancy levels.”

He says there is also still 30 hectares of vacant commercial land in the city available but with nothing planned for its future.

“Perhaps inner city residential is the solution, but this brings a whole raft of unanswered questions and risks.”

Ends

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