A Year After Lockdown – How Have Our Cities Fared?
Colliers research found both Auckland and Wellington have experienced increased rates of vacancy in the commercial sector, but is this the new normal or is change on the horizon?
- Overall vacancy over the second half of 2020 continued its upward trend from December 2019’s low, however, the rate of increase slowed from that evident in the first half of the year. Total vacancy reached 7.6% in December up from the 6.7% recorded in June. The latest figure equates to an additional 1,250 sq m of vacant space, taking the total to 11,000 sq m.
- The completion of Willis Bond’s redevelopment of the former Farmers Building at 100 Cuba Street was the only significant addition to the CBD’s inventory over the second half of 2020. Removal of stock for refurbishment or earthquake strengthening however, resulted in a net reduction of stock from a mid-year total of 154,505 sq m to 145,170 sq m at the end of the year.
- A rebound in retail spending has provided strong support to the Wellington region’s retail sector. Total retail spending over the second half of the year totalled $5.2 billion up 21.4% on the figure recorded in the first half of the year and just over 7% on the corresponding period in 2019.
- Rental values on like-for-like premises held steady over the second half of the year with newly developed space setting the new upper limits. The influence of movement at the upper end saw CBD prime average gross face rents increasing to $1,316/sq m. Rental levels within regional centres were steady over the second half of the year with average gross face rents at $1,075/sq m.
- Having softened slightly during the lockdown impacted first half of 2020 yield compression was a feature of the market over the second half of the year. Average prime yields for CBD located properties sit at 6.5%. Well located premises benefitting from strong tenant covenants see high levels of competition from investors when brought to market as evidenced by the recent sale of a Kilbirnie property occupied by Farmers at a yield of 6.0%.
Underpinned by government occupation and bolstered by New Zealand’s better than expected economic performance, vacancy within Wellington’s CBD increased only marginally over the second half of 2020. The overall vacancy rate increased from 6.4% to 6.9%. The increase was largely confined to the secondary market which saw vacancy reaching 8.7% whilst conditions at the prime end of the market remained tight with a vacancy rate of just 1.0%
- Tight market conditions and strong tenant demand has elicited a response from the capital’s development sector. The capital now has approximately 48,249 sqm of space currently under construction, 76.0% of which is subject to tenant precommitment.
- Environmental sustainability is becoming an increasingly important factor for tenants when considering their accommodation options. This has been well illustrated by the government which has mandated that from 1st January 2021, agencies are required to ensure, when entering or renewing a lease, that the subject property has a minimum 4-star energy efficiency rating.
- The limited number of prime quality investment assets being brought to market has driven further yield compression with new record yields achieved. Listed property vehicle Stride Property acquired 20 Customhouse Quay (Deloitte House) for $228 million, reflecting a yield of 4.5%. The 5 Green Star rated building was completed in 2018 and is 100% occupied.
- Prime gross face rents remained steady over the year for like for like properties. New benchmark gross rents approaching $900 per sq m are expected upon completion of new developments. Current average prime gross face rents sit at $615 per sq m and average secondary rents at $338 per sqm.
- Vacancy rates across Auckland continued their upward trend over the second half of 2020 due, primarily, to movement with the strip retail sector. Overall vacancy reached 4.5% in December up from the 3.3% recorded a year earlier. Overall strip retail vacancies (incl. suburban strips) have increased to a record high of 8.5%, up almost 15,500 sqm compared to the same time last year.
- Development activity within Auckland’s retail sector is currently subdued reflecting the uncertainty caused by the COVID-19 pandemic and changing consumer trends. This backdrop has highlighted the importance of flexibility within retail premises encouraging property owners to refurbish and reposition their assets. Examples being the recently completed projects at 246 Queen / 242 Broadway.
- While CBD retail rents are generally facing downward pressure the opening of Commercial Bay has seen new benchmarks being set at the prime end of the market. Average net face rents across suburban Auckland have declined by approximately 10% over the year to $683 / sqm. Large format rentals however have continued their upward trend with average net face rents ending the year at $363 / sqm.
- While the hospitality sector has been heavily impacted by COVID-19 enforced trading restrictions and border closures experienced investors are looking through the disruption and making strategic purchases of both hospitality businesses and properties occupied by them. Recent examples being Savor Group’s purchase of three restaurant operations in Britomart from Hipgroup for $11M. And the sale of a prominent Viaduct located premises at 204 Quay Street.
- Well located retail premises with strong tenant covenants continue to attract high levels of investor interest. The large format sector’s reputation as a safe haven asset class has been bolstered by a lift in consumer spending for a wide range of goods primarily sold from large format stores. Notable transactions include Argosy Property’s sale of the Albany Lifestyle Centre to property syndication firm Oyster Property for $87.5 million.
- Auckland CBD’s overall vacancy rate increased to 8.8% in December 2020, up from the record-low 4.7% registered just 12-months prior. The increase reflects a combination of the impact of COVID-19 and the addition of over 54,000 sqm of new prime graded stock. The latter primarily responsible for prime grade vacancy almost doubling to sit at 6.8%, up from 3.5% recorded in June 2020, whilst secondary grade vacancy increased from 8.5% in June 2020 to 10.6%.
- The completion of 136 Fanshawe Street will bring the current round of major development to a close. However, new projects look likely to commence sooner than may have been expected given the impact of COVID-19. Asset Plus is planning the redevelopment of 35 Graham Street which it expects to complete in early 2024. This could add some 25,800 sqm of prime grade space to the CBD’s inventory. Precinct Properties is also promoting the second phase of development at Wynyard Quarter citing a potential 2023 completion date. Plans are now in place to begin work for the redevelopment of 1 Queen Street later this year. The recently announced multi-use development at Aotea Square of some ~15,000 sqm of office space is earmarked to start in 2024.
- The introduction of new quality office developments and the availability of sub lease options within prime grade buildings has increased opportunities for companies to upgrade their accommodation. Global tech and business solutions provider NTT has secured the remaining space (1,400 sqm) within the Te Kupenga Building at 155 Fanshawe Street, bringing the new premium build to 100% occupancy. Insurance provider Tower will vacate its existing premises once development of new premium office building 136 Fanshawe Street completes in the later half of this year.
- Average net face rents are holding stable, with prime net face rents currently sitting at $512 per sqm and average secondary net face rents at $295 per sqm. Completion of new builds are expected to push prime face rents to circa $900 per sqm and higher in the coming year, but are likely to come heavily incentivised.
- After softening slightly in mid-2020, investment yields firmed over the second half of 2020 as competition to secure prime office assets with steady and reliable income streams intensified in the low interest rate environment. Precinct Properties recently sold its remaining 50% interest in ANZ Centre for $177.0 million representing an approximate yield in the low five per cent range.
Takapuna Case Study
Auckland’s Takapuna is set to come out of the Covid-19 pandemic ready to fire, says Takapuna Beach Business Association (TBBA) Chief Executive, Terence Harpur. More than $50m is being invested to modernise the North Shore metropolitan centre as part of the Panuku-led ‘Unlock Takapuna’ urban regeneration project as well as the private sector investing significantly.
It is hoped that this sort of investment in our cities will help revitalise them after a tough year of lockdowns and restrictions.
Harpur is one of many calling on office workers to come back to base, saying the ongoing absence of so many is being felt by town centres.
“Working from home really hits our shops, restaurants, and personal services,” says Harpur.
The TBBA has released Marketview data for the week ending 7 March – with six of those days under Level 3 lockdown. It shows total retail spend in Takapuna was down 76.8% compared to the same week last year.
In the week ending 21 February – which took into account the earlier three-day Level 3 lockdown – retail spend was down by 48.3%.
As well as showing a 76.8% fall in overall retail trade, Takapuna’s latest Marketview weekly report revealed spending in Takapuna on Hospitality & Accommodation was -74.4%; Food, Liquor & Pharmacies -53.6%; Clothing, Footwear & Dept. Stores -78.8%; Home & Recreational Retailing -73.4%; and all other -89.5%.
“We’re now hoping for a bounce, but overall spending has been behind all summer, so we’re not taking anything for granted,” says Harpur.
“We’re again calling on people to shop locally. We’re also putting a plea out to employers to think about the impact on town centres when office-based staff work from home.”