An historic low of 8.8 per cent in the overall vacancy rate for the Auckland Central Business District office market was reported for the first half of 2015 in the latest occupancy survey conducted by Bayleys Research.
The survey, conducted last month, recorded a fall of 1.8 percentage points from Bayleys Research's January CBD survey, driven mainly by a large decrease in B-grade vacancies.
"The survey was not unexpected as prime [premium and A-grade] vacancy is already at a very low level and mostly comprises smaller, part-floor tenancies," says Ian Little, national manager Bayleys Research.
"Some of the reduction in unoccupied space is due to buildings temporarily being withdrawn from the supply chain for refurbishment. However, there continues to be more businesses leasing or buying premises for occupation in the CBD than are vacating, with a net absorption of 15,134 sq m of space in the first half of the year," Little says.
"That reflects continuing growth in New Zealand's services sector, which accounts for about two thirds of the economy and drives office space absorption."
Little says the BNZ BusinessNZ Performance of Services Index (PSI) was at its highest point since July 2014 in June, extending a run of continuous expansion since October 2009. All of the five sub-indices were above the 50 reading that separates contraction from expansion.
"While economic activity growth is softening, as the slump in dairy commodity prices weighs on the country's main exports and earnings, a number of factors are helping fuel the services sector and hence the demand for office premises," says Little. "These include accommodative monetary conditions with very low interest rates and record high net migration with around half of those new migrants settling in Auckland."
Within the Auckland CBD, an increasing amount of that demand for office space is focused on buildings near the waterfront, Little says.
"The traditional core of the CBD used to run north to south up Queen Street. However, over the past few years development has focused very strongly on the northern sector of the CBD with most of the blue chip tenants now situated in this area. The centre of gravity has moved north and then fanned out to the east and west."
Vacancy in the northern waterfront locations has decreased a significant 2.3 percentage points since the start of this year, equalling the lowest vacancy seen in this location since 2009 at 7.1 per cent. Vacancy in the southern precincts, although trending down, is declining at a much slower rate and now sits at just under 12 per cent.
Little says there is currently around 60,000 sq m of CBD office accommodation on which construction is underway or soon to commence, with another 30,000 sq m being refurbished. The NZME building is nearing completion in Victoria Street West, while work is well advanced on Fonterra's new head office building opposite Victoria Park and a 9000 sq m building behind it which is being speculatively developed.
Neighbouring these developments on the corner of Gaunt Street and Daldy Street, will be another new building scheduled for completion in March 2017 with Datacom to occupy approximately 80 per cent of its 16,735 sq m. Also due for completion around that time is a 10,000 sq m building at 46 Sale Street.
Further out, Precinct Properties is proposing new office buildings in the Wynyard Quarter and an office tower on the Downtown site, going head to head with Mansons TCLM which is seeking resource consent for a high rise tower on NZME's current site in Albert Street.
There could potentially be a further 170,000 sq m of new CBD office projects completed over the next five years, says Little, providing working space for another 11,000 employees in the inner city which currently has a growing working population of around 100,000.
"However, with the next wave of development still in its formative stage, the total office inventory will not expand significantly in the short term," says Little. "Premium and A Grade office accommodation, for which the current CBD vacancy rate sits at under 3 per cent in particular will remain in very tight supply for some considerable time.
"There is already evidence of significant upward pressure on rentals for prime space as a consequence, reflected in a net rental of $650 per sq m for a floor in a new CBD building nearing completion. Rentals are likely to keep on rising until the development pipeline increases significantly."