Auckland’s Commercial Property Markets: The Worm is Turning
Auckland’s Commercial Property Markets: The Worm is Turning
As we head into the last quarter of the year the Auckland property market continues to print positive data. This increasingly supports the rationale that the market has moved to the next stage of the recovery.
Analysis from Jones Lang LaSalle shows that the Auckland market is showing solid signs of recovery, albeit slow and steady. This recovery is in line with a region wide economic recovery mirroring improvements across the board which continues to impact on business and retailer sentiment.
The office market is certainly experiencing a significant change, particularly in the prime end of the market as tenants demand higher quality premises and better locations off the back of positive economic signs. Vacancy is thus continuing to trend downwards.
The postponement of new office construction in the CBD in the aftermath of the GFC has also led to tightening of the Prime and A-grade space in the CBD with limited options above 800 sqm available. The supply pipeline in Auckland remains dormant and is not likely to deliver any additional stock until the last half of 2015 when limited new office supply in the CBD is due to be complete. This restriction in supply pipeline, coupled with increase in demand has caused Prime rental growth. With this, yields for both prime and secondary have continued to firm as investor appetite remains strong and gains momentum. The last six months have also seen a boost in larger sales with office assets totalling NZD 450 million (NZD 5 million plus in value) being transacted.
Although activity has largely been focused on the CBD with vacancy rates increasing across Suburban, Fringe and Symonds Street we anticipate that as Prime space in the CBD fills up, landlords will likely begin to bid up rents in the Fringe as they did through the previous cycle. Refurbishments contributed around 3,200 sqm to supply in the CBD Fringe over the last 6 months and these upgrades as well as new builds are helping push rents up in Auckland’s decentralised submarkets - suggesting that higher quality premises are sought after. Takapuna in particular has seen a large increase in office rents as occupier demand exceeded available supply.
Looking towards the Southern Corridor there remains a strong demand for office space in the precinct as evidenced by the recent leasing of the spec built premises in Goodman’s Central Park. Investors continue to show high levels of enquiry in the precinct which has resulted in a firming yield profile for the submarket. With supply and demand remaining relatively stable, the Southern Corridor remains well positioned to see continued growth in both rents and capital values.
Mark Grant, National Director of Markets for Jones Lang LaSalle, “We’re seeing the high demand for vacancy filtering down the market, reflected by both occupier and investor interest in the Fringe and Suburban markets.
“Occupiers are beginning to focus their attention on securing the highest quality space before an imminent rental upswing prevails. The lack of supply and increasing occupier demand will result in a gradual strengthening of landlord’s position relative to tenants. Investment activity will be reassured by this activity and as a result, yields will continue to firm.”
Overall retail sales in New Zealand and Auckland have continued to demonstrate robust growth with an average annual rate of 3.1% since 2009. This indicates that although we are aware that individual retailers have faced challenges over the last few years the sector has still managed to hold its own through the recession.
In the Prime retail space Jones Lang LaSalle is witnessing a flight to quality in the CBD market. In comparison, Suburban retail markets continue to experience moderate to low levels of demand. Takapuna and Newmarket have been suffering with an increase in vacancy due to low levels of confidence although there are signs this is changing.
Prime Auckland retail rents have continued to increase yet suburban rents have seen a drop. Over the last year yields have continued to firm across Auckland with investors pre-empting market improvements
Consumers are still ultimately playing it safe when it comes to spending which is having a knock on effect on occupiers. They are less likely to risk higher rents in submarkets where there is uncertainty however as the recovery takes hold over the next 12 to 18 months, this will change. This confidence will likely also continue to positively impact development.
Chris Beasleigh, National Director for Retail Sales and Leasing, says, “Although the market hasn’t supported the development of new supply up to the beginning of this year, we’re seeing signs of an improving market, particularly within big box retail and food initially. As economic conditions continue to improve we believe that future Prime retail rents for both CBD and Suburban markets will firm and demonstrate positive momentum which when combined with a relatively constrained development pipeline will push values up.”
Auckland industrial markets continue to show good balance between supply and demand with vacancy across the board remaining steady and low. Although rents have as a result remained stable, as has been the trend over the last few years, there is evidence in the market that incentives are reducing and will continue to do so. Investor interest in the sector in general is strong and yields have continued to contract as a result.
Sam Smith, National Director of Industrial Sales and Leasing, says, “Overall we have witnessed an improvement in the industrial market. We are seeing industrial space get swallowed up very quickly as momentum between supply and demand balances out with no significant movement in rent.
“With limited supply of industrial stock within consolidated areas, tenant options are restricted and in an improving consumer market, design build requirements are increasing. As a result of this demand pressure, industrial land owners are beginning to release land for this purpose.”
Auckland CBD and Frame office
Auckland Fringe and Suburban
Auckland Southern Corridor
Auckland Industrial North
Auckland Industrial South