Wellington has consolidated its market position following major government initiatives to rationalise space.
The country's buoyant business activity is the catalyst for strong city office market conditions, states the latest CBD Office Report from Colliers International.
Office leasing activity has increased nationwide, but quality is still the top priority for tenants heading into the next phase of the cycle, the report says.
It also notes that, despite employment growth intentions and solid fundamentals, many tenants are looking to combat rising rents and are reviewing their options.
"Rents will continue to rise, forcing tenants to become smarter in the way they occupy and use their space. Some landlords can provide the latest in workplace environments much more easily than others. There will be winners and losers over the short-term.
"Consolidation, rationalisation and efficiency are approaches many tenants are adhering to in this environment, to stay on top of ever increasing costs per square metre."
Colliers says prolonged period of positive economic conditions has enabled banks and developers to increase their risk appetite and progress with major supply projects.
"This will provide the CBD office market with new leasing options to progress to the cycle's next phase."
Investors continue to be extremely active and competitive in a low interest rate and strong occupier market. The difficulty at the moment for prospective purchasers is finding suitable properties to purchase with investors, owner-occupiers and syndicators all vying for properties.
"This has seen competitive pricing when stock does become available. While some view the new price levels as 'untenable', the fear of missing out (FOMO) is promoting greater levels of acceptance, facilitating a new wave of asset appreciation.
"More supply is providing some relief, but not enough to dampen market activity or purchaser demand," the report notes. "There is more stock availability than experienced since the highs of 2007 but with new supply still a few years away, tenants as well as landlords will be 'jostling for pole position'."
The report says CBD markets that are at, or near, cyclical vacancy lows will be insulated from a significant market correction. Certain sectors of the CBD market will also cope better than others, with lower quality 'seismically challenged' premises being the most at risk to perform badly over the next year.
Further key findings include:
• Businesses are confident, but cautious in their outlook. Employment intentions are up and this is assisting leasing activity. Economic growth will be near the long-term average over the next few years, which will keep the market stable at current growth rates.
• Occupancy rates are trending upwards across most major locations across New Zealand which is prompting rents to increase steadily. The areas experiencing the highest levels of employment growth are experiencing the highest levels of rental growth, and vice-versa.
• The market is entering the next phase of the cycle with construction activity ramping up across the main cities and this will provide the market with more space.
• Auckland remains on track for another strong year in the CBD office sector. Colliers is forecasting that the vacancy rate has bottomed out this cycle with new supply on its way. Rents will continue to rise with a short hiatus between 2019 and 2020 as the market recalibrates the effect of additional supply and yields will firm further.
• Wellington has consolidated its market position following major government initiatives to rationalise space and the market will move on more confidently. The 60 per cent of the office occupiers not in the public sector will continue to maintain market momentum.
• Christchurch is a market with a large development pipeline that continues to progress well. The level of new supply is dampening rental rises with vacancy likely to head above 20 per cent over the next few years. This is not the first time, nor the highest level of vacancy. Investors remain highly competitive for the best assets but they remain conscious of the shift of suburban tenants back to the CBD.
• Trends in regional markets show a major focus on higher quality premises for occupation and purchasing which is widening the gap between sectors that will be hard to rectify. Investors are scouring the market for opportunities, often pushing yields to new lows. However, yields at 8 per cent plus can still be found.