City fringe growth drives demand for office space

The vacancy rate in Parnell has fallen below seven per cent for the first time since 2005.

A powerful local economy in Auckland's city fringe areas has spurred business creation and expansion, driving increased demand for office space over the last year, says the 2016 Bayleys Research office vacancy survey.

"Along with limited new supply, the increased business impetus has resulted in a reduction in vacancy to their lowest levels since 2009 across these precincts," Ian Little, Manager Property Research Division for Bayleys.

The new research report says Auckland's economy grew at 3.4 per cent over the year to December 2015, outpacing the rest of the country which saw gross domestic product (GDP) growth of 2.5 per cent.

"The region's unemployment rate fell in the final quarter of 2015 to 6.2 per cent as job growth of 1.5 per cent outstripped the influence of the expanding workforce.

"The construction sector continued its rapid expansion with regional residential consent numbers climbing to 9,566 in the 12 months to March 2016 from 7940 a year earlier. The value of non-residential consents rose to $1,339 billion from $1,127 billion."

Little says a strong leasing market and increasing activity by owner occupiers saw office vacancy rates falling in city fringe areas.

"Lower vacancy has also been influenced by the continuing trend of conversion to residential use, particularly within areas where proposed new zoning rules unlock the potential for additional floors to be added to existing structures," he says.

Another factor has been low CBD vacancy rates with limited leasing opportunities there which has helped to drive city fringe vacancies down."

Overall vacancy across the city fringe precincts of College Hill, Grafton, Newton, Newmarket and Parnell stood at 10.5 per cent - down from the 2015 total of 13.7 per cent, according to the annual office vacancy survey.

Little says vacancy fell in four of the five precincts surveyed with only College Hill registering an increase in space to let.

The greatest reduction in vacancy was recorded in a resurgent Parnell where the vacancy rate has fallen to below seven per cent for the first time since 2005.

The latest survey saw total vacant space falling from in excess of 9300sq m to just over 4300sq m.

Ian Little, Bayley's Manager Property Research Division of Bayleys

"Lettings to Webb's Gallery and B Braun Medical at the previously vacant 23 Falcon St, along with the uptake of significant space at 125 and 130 St Georges Bay Rd were largely responsible for the positive result," the Bayleys report says.

"In Newmarket vacancy fell by 3.3 percentage points over the year to sit at 10.7 per cent. The successful leasing of over 1000sq m of space at 19 Morgan St to Mode Design, Next Step Partners and Reveal had a major influence on the vacancy rate - as did the uptake of space at 105 Carlton Gore Rd by Tomkin and Taylor. There has also been notable uptake of space at 5 Kingdon St by Ecovis KGA and at 414 Khyber Pass by Metric.

"Newton also saw a further improvement in its vacancy position with the rate falling to 15.1 per cent. While this is still the highest rate recorded within the fringe precincts it marks a huge reduction from the 36.4 per cent vacancy rate recorded at the time of the 2011 survey." Little says the downward trend in vacancy within the Newton precinct has in previous years been largely due to vacant office premises being converted to residential.

"There continues to be substantial demand for such opportunities from developers particularly within the Eden Terrace area with the attractiveness of premises being supported by new height overlays which allow for development of up to 20.5 metres."

The zoning changes, combined with the area's closeness to the Auckland CBD, good public transport services and easy access to the motorway system, has supported an active commercial property sales market over the last year. Over the past 12 months however, the decline in vacancy was also been driven by tenant uptake.

Grafton saw a 2.5 percentage point fall in vacancy again a marked improvement from the rate of 21 per cent recorded in 2013. For the second year in a row there was no vacancy within the precinct's highest grade stock.

The only city fringe precinct to have experienced an increase in its vacancy rate was College Hill, but once again A-grade vacancy held at zero per cent with the overall rise entirely due to a lift within the B grade sector.

In the Southern Corridor area there was increase in the precinct's inventory as a result of development and the completion of refurbishment schemes which led to overall vacancy reaching 10.3 per cent - the first time that double digit vacancy has been recorded since 2011.

"However, A-grade space here, in line with other precincts remains under pressure with vacancy of just 6.5 per cent," Little says.