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Auckland office supply puzzle

Auckland office supply puzzle

New research from JLL indicates that it is unlikely the current commercial property supply pipeline in Auckland will oversupply the market. After undertaking analysis of the potential development pipeline for the Auckland CBD and CBD Fringe, JLL have concluded that the current development pipeline is relatively well-matched to the demand profile forecasted over the next ten years. Between 190,000 and 200,000 sqm of office space is likely to be built in
Auckland CBD and Fringe, representing 16% of current supply. Given JLL’s forecast of annual take up, it is expected the supply will take between 9-10 years to be absorbed in the market.

Initial analysis indicated that the potential development pipeline for the CBD is close to 300,000 sqm over the next property cycle. However, as JLL consultant Sarah Dominey suggests, “The market is looking at something considerably less than that actually having a chance of completion over the period; several of the projects are long-term projects and will spill over into the next property cycle or may never make it out of the ground at all.”

Dominey continues “We established that total likely development will take close to ten years to be absorbed by the market. This uncannily matches the typical market cycle for the office market in Auckland, meaning the current development pipeline would likely take us back to about the same level of vacancy, in the same stage of the cycle as we find ourselves today.”

Office development has gained momentum in the Viaduct/Wynyard Quarter precinct and as a result of continued commitment from office occupiers, is portraying a positive outlook for the area. In addition to the Viaduct/Wynyard Quarter precinct, the Western Waterfront (the office precinct including PWC, Zurich House and Britomart) also remains active as one of the main development hubs. Sarah Dominey continues, “There is a definite hub of activity toward the waterfront, we believe this is due to the level of land supply and the resultant lower cost of land and development as well as the fundamental desirability of the location.”

Office space in the upper end of the CBD is suffering through increasing vacancy and soft rents. With the proposed City Rail Link (CRL) targeting the development of three new stations including Aotea Square, JLL believes there is a positive story to be told regarding the fortunes of the upper end of the CBD. This will be unlikely to take effect until 2020/21 at the earliest meaning that it is likely to impact the current supply cycle – rather the next. Consolidated
office areas such as Shortland Street remain should supported as tenants are attracted to the area and there is limited new supply to impact on rents.

After analysing the rental levels required to trigger the development for the different office market segments, JLL predict that it is likely to be a couple of years before market rents will justify a new Premium development in the CBD. Market rents in CBD Fringe areas however are already sufficient to justify new development meaning the CBD Fringe’s market share of new supply is likely to dominate the CBD for the medium term.

Justin Kean, Head of Research at JLL concludes, “Economic rents for Premium space today are unlikely to justify new development on their own merit however our analysis suggests that we are some 10-20% away from this level. Our rental forecasts indicate that the market will hit these rental levels by mid-2016, coinciding with the timing of several new projects set to come out of the ground.”

– ends –

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