Demand for commercial real estate in Auckland's CBD remained elevated over the first quarter of 2019 according to New Zealand commercial real estate firm JLL.
The agency has released its First Quarter 2019 Market Snapshot research detailing the state of the CBD's office and retail markets.
Beginning with the office market, JLL senior research analyst Daniel Longmire says vacancies in large prime buildings have been maintained at low levels.
"Without a significant change in stock via additions or removals, we have not observed any significant material differences," says Longmire.
"As at the second half of 2018, prime vacancy dropped to 4.7 per cent, which was closely followed by secondary vacancy at 6 per cent. "
"We forecast a slight moderation in vacancy rates as pressure is taken off as new developments reach completion, including Commercial Bay, anticipated to be delivered early in the second quarter of 2020 delivering around 39,000sq m."
Supply remained relatively static with no new stock added to the market over the last quarter. However, Longmire says there is development on the horizon.
"Several projects have progressed further through the development pipeline, including refurbishment works at 246 Queen St and a crane being erected at 10 Madden St," he says.
"Additionally, construction activity has commenced at Mansons' 136-142 Fanshawe St site, which is expected to deliver 22,000sq m of A-grade space into the market once completed."
In terms of asset performance, JLL's research shows prime rents in the CBD office market saw a slight increase to $496 per sq m after taking a brief pause.
"Secondary rents have been put to a standstill over the last quarter, after several periods of consecutive growth," says Longmire.
"Rental uplift is expected to regain upward momentum as new supply entering the market sets new rental benchmarks.
"Yields saw minor drops in both the prime and secondary sectors, now sitting at 5.5 per cent and 6.46 per cent respectively.
"Transaction volumes slowed coming into 2019, with purchasing activity in New Zealand typically rising from the second quarter onwards."
Longmire says the CBD retail market is tough to break into.
"With no new large vacancies available in this portion of the CBD, there are virtually zero opportunities for new retailers to enter the area without compromising for a space further up the city's busiest shopping street," Longmire says.
"Strong spending by cruise ship visitors along with the overall flow of tourists has helped maintain competition for space and, in particular, from high-end offshore retailers looking to enter the market.
"The opening of Commercial Bay is expected to alleviate some pent-up demand and create some vacancy as occupiers reshuffle to an extent."
The refurbishment at 175 Queen St (Typo, a stationary retailer) resulted in an increase in overall supply over the first quarter. However, a dramatic shift in stock isn't expected until the completion of the 18,000sq m retail component of Precinct Properties' Commercial Bay development in 2020.
Outside of this, there are a number of small to mid-size refurbishment projects underway, including 1900sq m at 246 Queen St, which will see both office and retail stock returned to the market in the first half of 2020.
In terms of asset performance, Longmire says the retail sector's longer term structural changes means that rents for all properties in this asset class across the Auckland market have continued on a downward trend in the first quarter of 2019, with secondary assets seeing steeper declines.
"Prime CBD rents fell from $2925 per sq m to $2908 per sq m, (down 0.6 per cent) in the quarter, with a further softening forecast over the remainder of 2019.
"Reductions are driven primarily from rents falling away in the lower end of the grade spectrum, a trend expected to persist over 2019 and into 2020," says Longmire.
"Yields are naturally pushing out due to sectoral uncertainty, with prime CBD seeing an increase in the first quarter of 2019 to 5.88 per cent from 5.83 per cent. This follows similar yield performance of regional assets."
Longmire says moving forward, JLL expects landlords to choose to hold or redevelop rather than divest.