Auckland office vacancies in second-grade properties have doubled in the past year, mainly due to the pandemic, lack of overseas students and the tourism downturn.
Paul Winstanley, head of research and consultancy at JLL New Zealand, said while premium and A-grade space remained well-leased and was hardly affected by rising vacancies lately, the pandemic has had a big effect on other sectors of the market.
Secondary vacancies rose from 5.6 per cent a year ago to 11.2 per cent as of June 30, "so that is a big shift. That's mainly the C and D grade buildings," Winstanley said.
Auckland now had 71,276sq m of secondary B, C and D-grade CBD offices classified as vacant, he said.
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Upper Queen St and Mayoral Dr older 1970s and 1980s buildings on multi-tenancies are in that category of property. These are not state-of-the-art central CBD office blocks with the latest lifts, air conditioning, lighting and layouts.
The pandemic had partly driven that rise "because obviously a lot of the occupiers were on shorter-term agreements, often in smaller spaces. They are often small-scale businesses such as in the tourism and education sectors. It's obviously taken a big hit due to our borders being closed," Winstanley said.
The doubling of vacancies meant falling income for investor-owners, he said.
"Incomes are under pressure. With fewer tenants, there's less money," Winstanley said.
The possibility of converting the C- and D-grade Auckland CBD office space to new uses could be examined, perhaps as hotels or apartments, he said.
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"Ultimately these buildings could be replaced," he said of possible demolition.
Total Auckland CBD vacancies rose from 5.2 per cent in last year's second half to 8.1 per cent by June 30, 2020. That means 101,000sq m of floor space is unoccupied.
Auckland CBD has just over 1.2 million square metres of total office space across all categories of office stock.
Premium buildings include the new Commercial Bay and the Vero Centre on Shortland St.
Winstanley said prime vacancies were "still pretty low in an historic sense. But we're seeing a big split between primary and secondary office space."
A year ago, premium and A-grade vacancies were 4.7 per cent and currently they are only 4.8 per cent, he said. That equates to 29,792sq m of empty premium and A-grade space.
"It's risen so little because people have been clamouring for prime property in Auckland for some period of time," Winstanley said.
A vacancy is classified as a property without a rent being paid but there are offices which are being sub-let which could drive up the vacancy percentage. If the property has a lease and someone is paying the rent, it is not classed as vacant. However, the tenant could be trying to sub-let that space, meaning that activity is not captured in the figures.
"The trend towards making sure offices are a modern and collaborative space is ongoing. People have been looking for quality space in the better-grade buildings. The economic changes have emphasised that and speeded up that trend," Winstanley said.
"We're seeing more focus now on how people are going to manage their offices because people have realised working from home doesn't work for everyone all of the time. There is more flexibility. People are now really benefiting from their time in the office. Working from home was fine in lockdown because we were all in lockdown and we had the same shared experience.
"The office is a lot more popular than it was pre-Covid because people benefit from collaboration. It's hard to do that with everyone at home," he said.
JLL releases its latest market survey in the next few days.
JLL's real estate market intelligence service said prime CBD rents were around $518/sq m a year. These were up 3.3 per cent over a six-month period.
Completion of Commercial Bay provided an additional 39,000sq m of premium space. However, it was 92 per cent leased at the time of opening.
Notable new developments now underway were 10 Madden St with 8000sq m, 155 Fanshawe St with 16,000sqm and 136 Fanshawe St with 20,000sq m. All those developments had high tenant pre-commitment levels.