Tenants want better in Auckland office market

33 Corinthian Drive was sold for $50.5 million, representing a yield of 5.88 per cent.

Colliers International Research's latest annual review of the Auckland metropolitan office market shows a busy year of activity with ongoing occupier demand for higher quality spaces leading to the construction of new buildings and refurbishment of existing premises.

Chris Dibble, Research and Communications Director at Colliers, notes that solid occupier demand with a reduction in overall vacancy to 5.6 per cent and prime vacancy at just 3.3 per cent provides the detail in how tenants searching for quality space are driving the market forward.

"Landlords want the best companies, companies want the best staff, staff want the best working environments. For this flow-on-effect to work best, landlords need to assist with the delivery of better workspaces," says Dibble.

Occupier demand for higher-quality premises has led to over 25,000sq m of office stock removed from the Colliers International metropolitan office survey in 2019 for refurbishment works.

One example is the 107 Carlton Gore Road refurbishment by Argosy who is targeting a green star rating for incoming tenant Housing New Zealand Corporation.

Dibble says the flight to quality phenomenon is not new, but it has changed and been accentuated by the proliferation of coworking, serviced offices and other SME-centric leasing models that provide a new look and feel on how people work.
"There are the proven productivity and staff retention and attraction benefits of the new modern way of working.

"There is also the rise in social media and having 'Instagrammable' office space that can make the difference in today's leasing environment.

"Having the blend of these conditions is a key differentiator when it comes to marketing space," says Dibble.

The rising quality of space has an associated cost, but it is also the limited space and steady employment provide the impetus for metropolitan office average net face rents to continue rising.

While low and average net face prime rents now sit at $325/sq m and secondary at $215/sq m, often rates sit well above these levels, especially for the most desired space across the city.

From an investment perspective, Gareth Fraser, Auckland Director of Investment Sales at Colliers International notes that lower interest rate expectations are driving investor demand.

"We have had a record year, with experienced investors and new entrants looking to take advantage of the positive market conditions.

"Many are turning to commercial property due to less government regulatory focus as arising in the residential sector. Also the comparably low returns offered by traditional savings methods such as term deposits is another factor driving activity," Gareth says.

Average yield compression for the 12-months to September 2019 was 60 basis points to 6.2 per cent for prime office stock and 70 basis points to 7.1 per cent for secondary office stock.

Gareth notes that investment opportunities are becoming more difficult to source at these yields with softer yields typically a result of more complex issues that need to be resolved.

"High quality, sought-after property is generating significant enquiry and selling fast. We have had a very successful year with properties being taken to auction as well, with clearance rates just below 80 per cent.

"We view sales activity this year at record highs and competition is strong for quality assets. Private investors, owner-occupiers and syndication companies are the most active," says Fraser.

Some recent high-profile metropolitan office sales this year include Stride Property Group settling on the ASB Bank tenanted property at 33 Corinthian Drive. Property and Funds Manager Oyster Management purchased the property for $50.5 million representing a yield of 5.88 per cent. Settled in August this year, a local private investor sold 57 Market Road for $11.6 million to an Australian-based investor representing a yield of 5.78 per cent.