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New Builds Support Flight To Quality For Office And Retail But Construction Costs Remain A Headwind

The latest data from JLL NZ shows rental growth across all sectors of the Auckland Commercial Real Estate market.

Highlights from JLL NZ’s first quarter Market Snapshots include: a new record high for Auckland premium office rent of over $800 psm; the first quarter-on-quarter rental growth in the city’s retail sector for almost two years; and a 13% year-on-year increase in prime rents for industrial property.

Office and retail

JLL NZ’s Head of Research, Gavin Read, says rental growth is an important mitigation to softening yields and reflects demand for quality premises which, at least for the office and retail sectors, continues to be serviced by a pipeline of new developments.

Gavin Read

“Average prime office rents in the city increased $10 per square metre in the first quarter of the year, while rents for secondary stock have remained stable. We anticipate prime rents will continue to increase through the second half of the year while vacancy will remain at around 10%, despite the completion of new landmark developments in the CBD and at Wynyard Quarter. This will mean the impact on the secondary property will continue to grow.”

Read says the data also paints a positive picture for the city’s prime retail market, with rent increases mirrored by a drop in vacancy as the completion of long-anticipated infrastructure improvements draw near.

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“We see this strong leasing activity as a lead indicator for transactional activity later in the year, as the CRL draws closer and investor confidence in the sector picks up.”

Read says another Auckland retail trend to keep an eye on is the plateauing of suburban activity, as retailers who took advantage of the suburban drift through the pandemic to establish themselves now look to grow through an enhanced online offering rather than expanding their physical footprint.

Industrial

Demand continues to outstrip supply in the industrial sector, putting significant upward pressure on rents in both the prime and secondary markets, up 13% and 8.7% for Q1 year-on-year respectively.

While Read says there’s a strong development pipeline, particularly in South Auckland, construction costs are presenting a significant headwind which means he expects the market to remain tight for some time.

“We know the flight to quality phenomenon would permeate through more strongly to the industrial sector if it could, as operators value the contribution modern buildings can make to their net zero and ESG commitments. But with limited vacancy across Auckland, Wellington and Christchurch, fit-for-purpose space remains at an absolute premium.”

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