Deferment of new office construction in the Auckland CBD will restrict growth within New Zealand's largest employment zone, predicts Chris Dibble, Auckland research manager at Colliers International.
"For 2 years the Auckland CBD office vacancy rate has declined and is forecast to remain historically low," Dibble says. "The top end of the market will soon be under significant pressure with a lack of space limiting options and hampering the growth of businesses that want to expand."
While some of the businesses in prime office space may shift to city fringe or secondary accommodation, many will want equivalent or better quality space within the CBD, he says.
"Given the lead time required for construction, there needs to be a new office building in the CBD started sooner rather than later so that Auckland's growth is not hampered."
According to the latest survey by Colliers International Research, businesses occupying top-end space are the most active segment of the market, with the prime vacancy rate almost halving in the past two years, reaching 5.8 per cent in June 2013.
"While there is a limited pool of large tenants that are not on long leases and who are able to pre-commit, there is still leasing activity," Dibble says.
"Two notable examples in the past seven months are major lease renegotiations by law firms Russell McVeagh of 6200sq m and Bell Gully of 6500sq m. Both are in the Vero Centre and were negotiated by Rob Bird and Paul Dyson of Colliers International."
Dibble says efficient premises may be able to accommodate employment growth in less space, but there will be a tipping point with overflow requiring businesses to move to new premises.
"Without this new space, business and employment growth will be restricted, putting the brakes on the engine room of Auckland," he says.
Space to be vacated at 205 Queen St, the ex-National Bank Tower, provides one opportunity, says Dibble. The amalgamation of the National Bank and ANZ into the award-winning ANZ headquarters on Albert St will unlock just under 7000sq m of prime space.
However, 5050 sq m of prime space will be tenanted by September. Despite the inclusion of the new ASB Building in Wynyard Quarter, the prime vacancy rate will remain sub-7 per cent even if there is no absorption at 205 Queen St. The long-term average prime vacancy rate is 8.5 per cent, according to Colliers International Research.
The situation is even tighter in the premium sector with the vacancy rate which sat at 4.8 per cent last month forecast to decline to 2.7 per cent or just 5000sq m.
Dibble says there are 10 sites in Auckland's CBD that could accommodate a new premium office building. One of these is the Downtown Shopping Centre bought by Precinct Properties in 2012 which has existing resource consent for a 71,000sq m mixed-use office and retail development.
"Given the two hectares of premier office accommodation owned by Precinct Properties surrounding the Downtown Shopping Centre, this is a logical choice," says Dibble.
Auckland Council designated the site's involvement with the City Rail Loop (CRL) in August 2012 and Precinct has signalled interest in working together with the Council.
"The CRL seems likely to proceed following the announcement last month that the government will assist in project funding, with Precinct suggesting natural advantages of developuing the site, but no physical works expected before 2016."
Other potential sites include the former Auckland Star development site on Shortland St and the nearby site once touted for ANZ's new HQ before the decision to stay and consolidate to Albert St was made, he says.
"With ASB Bank moved into Jellicoe St and Fonterra to be relocated on to a large site bounded by Fanshawe, Daldy, Gaunt and Halsey Streets, Waterfront Auckland is also now promoting various sites suitable for up to 50,000sq m of office accommodation within the Wynyard Quarter, which is also a viable location.
"While occupier demand is rising, one inhibitor for developers is the mismatch between the costs to develop and rents currently being achieved.
"A new premium office tower would need to be at least 20,000sq m to be viable for developers."
Dibble says premium gross rents currently range between $450 per sq m and $670 per sq m, with the limited supply of available space fuelling a rise in rents, principally from a reduction in incentive packages.
Colliers International Research is forecasting further rental growth with premium net rents predicted to increase by 2.5 per cent between now and mid-2014, followed by a 5.3 per cent rise the year after.