Auckland's commercial property market remains attractive to investors with high levels of capital, and especially funds from offshore institutions, seeking secure assets which is having a positive impact on demand and property prices.
Releasing CBRE New Zealand's latest Marketview report, Zoltan Moricz, the agency's head of research says Auckland office vacancy is down across the grades.
"CBD vacancy decreased by 0.6 per cent to 8.2 per cent during the first half of this year; while prime office building vacancy decreased to 5.6 per cent as a result of a significant amount of A-grade space leasing and occupation," Moricz says.
Secondary office space vacancy also decreased from 11.1 per cent to 10.7 per cent during the six months to June 2018.
"The office sales market has been especially active this year to date with a number of prime buildings selling in a yield range of 5.3 per cent and 5.75 per cent. This has resulted in indicative yields for CBD office space dropping by 0.24 per cent so far this year to historic market lows."
However, Moricz says investors are clearly looking past the prospect of a temporary drop in rent returns for the office sector.
"In fact, office yields dropped the most of any asset class in the first half of the year - by 0.24 per cent – but this is of little surprise given the amount of investor interest from offshore parties."
The research report states that the 'absorption' of office market space was a positive sum total of 5200sq m for the first half of this year - allowing for all the move-ins and move-outs during the period.
The positive total was heavily influenced by Vocus taking up 5100sq m of 6400sqm available in the recently completed six-floor building at 34 Sale St, in the Victoria precinct.
Other sizeable prime grade office space take-ups include Apple leasing 2200sqm in the 17,000sq m seven-level energy- efficient and five-star office design building, in Gaunt St within the Wyndham Quarter; Auckland Tourism occupying 2000sqm of over 6300sq m in another five green star rated eight-level building at 167B Victoria Street West; and BNZ taking up 2000sqm in the state-of-the-art refitted 26-level refurbished tower at 125 Queen St.
Moricz says there have been no notable leasing deals involving secondary grade office space this year and the 0.4 percent vacancy decrease was mainly driven by buildings being withdrawn from the market. "Some of these are undergoing, or are set for, refurbishment, and they will be impacting positively on the supply of available office space in the next year or two."
The CBRE research reports reveals that industrial property continues to exhibit the strongest market performance.
"Despite an active supply environment, industrial vacancy is below 1 per cent with many of Auckland's key areas like Highbrook filling up fast and creating supply capacity bottlenecks at a time of significant demand pressure," says Moricz.
"Auckland's industrial vacancy at 0.9 per cent reached a new cyclical low in the first half of 2018 – occurring in an environment of healthy demand and good rates of net absorption in the face of continued positive supply trends."
Land values increased by 4.4 per cent in the first half of this year resuming a strong growth trend observed since June 2015. Overall indicative land values stand at $508 per sq m as of June 2018, increasing at an 8 per cent annual average rate over the past five years.
Mt Wellington was the top performer in relation to highest land values in the first half of this year increasing by 9 per cent in the past six months - reflecting increasing commercialisation of the area. However, Wiri continues to be the top performer over the course of the current cycle with land values increasing 78 per cent over past five years.
"Auckland retail sales growth is positive although the pace of growth has slowed. This reflects a number of headwinds such as the slowing housing market and lower immigration. Although other drivers are present, the impact of more subdued trading conditions can be felt in shopping centre vacancies which have increased in the first half of the year."
Moricz says the investment market is now crying out for more opportunities to secure high quality stock but the traditional drivers of national growth eg: housing, immigration and construction, have shifted, coupled with discontent from businesses around the change in government creating some negativity.
"Next year should be different with central and local government increasing the spending on major infrastructure projects like Auckland's city rail, new motorway developments, housing, education and health, which will give a boost to incomes through higher minimum wages.
"New Zealand's positive financial environment with relatively low interest and exchange rates are the main factors stimulating this anticipated improvement. Forecast GDP growth of around 3 per cent will be modest, however, below the highs of the 2014-2016 period yet still healthy in a global context; and expected to continue to attract foreign investment, including into commercial real estate.
"Immigration driven population growth, which has been a significant driver of economic growth in the past few years, has slowed but is still very positive and will keep supporting demand for housing, infrastructure projects and consumer spending."
With Statistics New Zealand projecting that the city's working-age population, aged over 15 years, will grow by 773,000 over the next 25 years, these fundamentals aren't expected to change.
Senior managing director for CBRE New Zealand, Andrew Stringer says much longer term the commercial property market needs to consider how it will cater for the growing needs of expanding metropolitan centres and main employment areas.
"The Auckland Unitary Plan has clearly articulated the need for urban redevelopment around key transport hubs which will require greater coordination between public and private sectors, with the public sector signalling its intent to release land for development. This will have a very strong influence, where commercial capital will apply itself."
Stringer says it's not just a question of catering for the scale of growth, but observing how the population grows physically and demographically.
"Auckland is a highly attractive destination in its own right but if we're to continue to attract strong investor interest in the market, we need to stimulate interest outside of traditional sources. We're already seeing this in the current market, with the rapid expansion of investment in the retirement and childcare sectors, responding to massive shifts in demand at either end of the age spectrum.
"The build-to-rent sector is poised to support increased housing supply amid declining homeownership rates and affordability challenges. This is the second 'most invested' commercial property sector in the United States, behind the office sector, but is yet to emerge strongly in New Zealand.
"It's about identifying future trends of how people are living, working and spending their leisure time and providing the property solution to meet that."