Premier city office space snapped up

The proportion of Auckland city's premium or A-grade office space that is empty has more than halved during the first six months of this year.

"Much of what is left comprises small pockets of vacant space," says Gerald Rundle, manager of Bayleys Research, who has announced the results of a mid-year vacancy survey conducted by the agency in July.

Rundle says vacancies for top-grade office space have dropped from 6.9 per cent early in 2014 to 3.2 per cent in the latest survey.

"Tenants' preference for prime quality office space in Auckland's Central Business District has once again come to the fore," he says.

"A tenant looking for a large single floor area, let alone contiguous floors, of prime space in a building in the CBD has a very limited choice in today's market."

Rundle says this contrasts with the B and C-grade secondary market, where the Bayleys Research CBD survey shows a vacancy rate of 16.9 per cent - up from 14.3 per cent at the beginning of the year.

Rob Cross, Bayleys' Auckland commercial leasing manager, says this is a reversal of what happened during the long and slow recovery from the global financial crisis when prime vacancies increased while secondary vacancy declined as businesses focused on reducing overheads.

"With the economy now growing strongly and business confidence at high levels, companies are much more willing to commit to long-term leases on quality premises," says Cross.

Developers are responding to the fall in vacancy rates by creating new state-of-the-art premises such as Mansons TCLM's 18,600sq m building at 151 Victoria St West and Fonterra's new headquarters in Fanshawe St, says Cross. There has also been a step up in the refurbishment of existing buildings.

Rundle says the desire by tenants to be housed in prime quality accommodation is also reflected in a preference for buildings at the northern end of the city near the waterfront. As a consequence there has been a strong focus on this part of the CBD in new office development with over 80 per cent of prime grade office space now situated in the northern precincts.

"This split is likely to become wider as development of good quality office space continues to be concentrated on this area," says Rundle.

The jump in secondary vacancy to almost 17 per cent means it is now at a level not seen since 1999, says Rundle, again reflecting the flight to quality and the increased opportunity for tenants to access prime buildings.

"The proportion of the total office space in the CBD considered to be of prime quality was as low as 26 per cent 10 years ago, meaning the option to locate in quality accommodation was very limited. This has changed dramatically, with prime space now accounting for over 40 per cent of CBD office accommodation."

The education sector has been the saviour of the secondary market and it continues to be so, says Rundle, although its growth appears to have plateaued.

The majority of office accommodation occupied by education tenants including the University of Auckland and the Auckland University of Technology (AUT), tertiary support services, language schools and training colleges, is secondary B and C-grade quality. The amount of space occupied by the education sector across the CBD has remained largely unchanged for a number of years, sitting at just under 180,000sq m.

"This represents a significant 13 per cent chunk of the total office space in the CBD," says Rundle.

"In contrast to the corporate tenancy drift to the north, the education sector dominates the southern precincts where education tenants occupy around a quarter of the office accommodation."

The continuous evolution of the CBD will result in it consolidating more into quite distinct zones, says Rundle. "We are already seeing the CBD evolve into a corporate and hospitality northern area - and education and entertainment to the south. The next growth phase will be focused to the west with commercial development continuing in the Victoria Quarter and most noticeably in the Wynyard Quarter where most of the CBD's development land is located."