KEY POINTS:
During the past six months, there has been increased interest and absorption of B-grade space in the Auckland CBD, says Bayleys Research in its newly released overview of the office market.
Although some tenants have chosen to lease B-grade space due to the lower cost, many tenants have
had little choice but to continue leasing existing B-grade premises due to a lack of better quality options and time constraints, says Bayleys Research manager Gerald Rundle.
The latest survey shows that Auckland's CBD office market experienced positive net absorption of around 17,000sq m during 2007.
This was a strong performance compared with 2006, when a net absorption deficit of 24,000sq m was recorded.
Net absorption was notably slow in the second half of 2007, although the preference for quality space - that was noted in previous reports - continues unabated.
Rundle says the lower net absorption over the second half of 2007 is a result of increased vacancies occurring in lower grade office space, especially C and D-grade space in tandem with the lack of suitable space in higher grade buildings.
Rundle says the Auckland CBD office market continues to consolidate on the strength and growth of the economy, reflected in the relatively stable vacancies recorded in the past few years.
Since January 2002, the bi-annual survey undertaken by Bayleys Research has recorded vacancy rates ranging between a tight band of just 2.4 percentage points from the record low of 9.5 per cent recorded in July 2007 to the 11.9 per cent recorded in January 2004. The current rate sits at 9.6 per cent. During this time, there have been a number of big developments including the Lumley Centre, Vodafone building, Microsoft building and the KPMG building.
While a large proportion of these developments have been design-built for one major tenant, the strength of the market can be demonstrated by the absorption of the space left behind as these large corporate tenants have upgraded, says Rundle.
The appetite for business growth with the preference for quality space has enabled many owners of Auckland CBD office space to increase their rental rates.
Generally, the largest increases in rents have been by owners of higher quality space.
However, rises have also filtered through to the lower quality buildings, which have also seen a general increase in recent years.
There are a number of key future office developments taking place or in the pipeline, with a majority of these premises tenanted or expected to be upon final completion.
This will lead to the further expansion of the Auckland CBD office market's net lettable area by around 85,000sq m.
In the short term, Bayleys Research anticipates that the Auckland CBD office market will continue to perform strongly and consolidate on the strong foundation that has led to its current healthy state.
The latest market dynamics and forecasts of office development and refurbishment indicate that the overall vacancy rate should continue to plateau around 10 per cent, says Rundle, although any new additional construction plans that may arise will challenge that.
While there have been steady increases in rents in recent times, this is expected to level out in the short to medium term, with currently under-rented premises increasing to market levels.
Anecdotal evidence suggests that owners of office space in the Auckland CBD are investigating further the protection of the underlying value of the building, says Rundle.
This could result in increased levels of inducement outside of the standard tenancy agreement in exchange for higher face rental levels.
