Cracks are starting to appear in the Auckland commercial property market, with more than 148,000 square metres of planned city office developments parked for now.
What's more, vacancy rates in the country's largest city were likely to ramp up as the recession takes hold, and as an additional 122,000 sqm currently being built comes on stream in the next 18 months.
Auckland developers and commercial landlords have been on easy street for the past five years as CBD office vacancy levels hit historic lows, ending 2019 at 4.7 per cent.
Metropolitan vacancy levels have also been at a low 5.6 per cent, despite 28,000 sqm of office space being added over the past 12 months.
That strong level of demand resulted in a 'build it and they will come' development mentality, with schemes being progressed with minimal or no leases in place at all, according to Colliers International.
The commercial property brokerage said changing market dynamics have seen many speculative developments grind to a halt. Projects with potential floorspace of 75,250 sqm in the CBD and an additional 73,300 sqm in the metro market are now on hold in the absence of pre-commitment from tenants.
One Queen St
Among those deferrals was Precinct Properties' $298 million One Queen St redevelopment project, which had included the expansion of the existing HSBC House bringing an InterContinental Hotel, 8,700 sqm of office accommodation and retail to the lower Queen St site.
Precinct said that the period of deferral would let it "more reliably assess the long-term impacts on the tourism market and broader economy." However, BusinessDesk understands a number of signed One Queen tenants – including legal firm Bell Gully – were reviewing their options.
In its latest research report on the Auckland market, Colliers said while it was too early to classify the projects as abandoned, "the pipeline is less certain and the length of delays unknown," although projects could move to the construction phase almost immediately should an anchor tenant be identified.
Global real estate firm JLL said with the office sector highly sensitive to changes in employment expectations, it expected a change in demand relative to available supply, known as net absorption, with a reduction of 22,900 sqm through the Auckland and Wellington office markets for 2020 and 2021.
Andrew Ballantyne, JLL head of research, said sublease activity was also up, which was a reliable indicator of a pending downturn.
Ballantyne doubted it would reach the levels experienced in the early 1990s, when Auckland and Wellington had experienced vacancy rates of 29.1 per cent and 17.6 per cent respectively, mainly because of modern density and reduced workspace ratios.
JLL estimated average workspace ratios were between 20 per cent and 25 per cent lower today than the in late 1980s, so layoffs would lead to less excess space than in previous economic downturns.
Ryan Johnson, Bayleys national director of commercial, said while the known Auckland sublease market was about 40,000 sqm of about 1.4 million sqm of total office space, that "will track up" as conditions get tougher and businesses exit existing longer term leases.
Johnson expected pricing to come under pressure, in particular, for secondary grade assets, which could also see lower occupancy rates and potentially reduced rentals.
"Banks are taking a closer look at the underlying tenant mix, and the risk premiums for secondary grade properties will affect lending criteria."