New city building projects won't lead to oversupply

Development in the Viaduct/Wynyard Quarter precinct is particularly buoyant.

Forecasts show CBD demand likely to match supply, reports Colin Taylor

Planned commercial construction projects making up the Auckland "supply pipeline" are unlikely to see the city centre or fringe markets being oversupplied with office buildings, says new research from Jones Lang LaSalle .

After undertaking an analysis of the potential new office development for the Auckland CBD and fringe precincts, JLL has concluded that planned buildings are "relatively well-matched to the demand profile forecast for the next 10 years".

JLL research consultant Sarah Dominey says between 190,000 and 200,000sq m of office space is likely to be built in the near future, representing a 16 per cent increase on the current supply.

"The potential development pipeline for the city centre is close to 300,000sqm over the next property cycle but considerably less than that actually has a realistic chance of completion over the period.

"Several of the projects are long-term and will spill over into the next property cycle or may never make it out of the ground at all," Dominey says.

"Given our forecast of annual office space take up, we have established that the total likely development will take close to 10 years to be absorbed by the market, which uncannily matches the typical cycle for the office market in Auckland. This means the current development pipeline will probably take us back to about the same level of vacancy, in the same stage of the cycle as we find ourselves today."

JLL says office development has gained momentum in the Viaduct/Wynyard Quarter precinct and, as a result of continued commitment from office occupiers, is portraying a positive outlook for the area. In addition, the Western Waterfront office precinct that includes the PWC building, Zurich House and Britomart also remains active as one of the main development areas.

"There is a definite hub of activity toward the waterfront.

"We believe this is due to the level of land supply there, the lower costs of land and development in that vicinity, and the fundamental desirability of the location."

Dominey says office space in the upper end of the CBD is suffering through increasing vacancy and "soft" rents.

"However, with the proposed City Rail Link (CRL) targeting the development of three new stations, including Aotea Square, we believe there is a positive story to be told regarding the upper end of the CBD.

"Consolidated office areas such as Shortland St should remain supported as tenants are attracted to the area and there is limited new supply to impact on the rents."

JLL also predicts that it is likely to be a couple of years before market rents justify a new premium office development in the CBD "on their own merit".

"Our analysis suggests that we are some 10 to 20 per cent away from this level," says Justin Kean, head of research at JLL.

"Our rental forecasts indicate the market will hit these rental levels by mid-2016, coinciding with the timing of several new projects set to come out of the ground."

After analysing the rental levels required to trigger the development for the different office market segments, JLL does believe that market rents in the CBD fringe are already sufficient to justify new development.

"This means the CBD fringe's market share of new supply is likely to dominate that in the CBD for the medium term," Kean says.