Space at a premium if economy grows

Demand for space in Auckland's central business district is predicted to increase. Photo / Supplied

Underlying demand for Auckland office space could exceed supply by more than 270,000sq m over the next four years if New Zealand continues its climb out of the global recession, with strong demand also expected for industrial space.

These are among the positive predictions contained within CB Richard Ellis' latest research document entitled Auckland View compiled by the agency's research director, Zoltan Moricz.

Moricz says the economy has been in recovery since the middle of last year and will strengthen next year leading to more occupier demand, particularly in the Auckland office and industrial sectors.

"Underlying demand for industrial premises could exceed supply by nearly 500,000sq m over the next five years, while in Auckland's retail sector supply is expected to match demand.

"While property commentators have focused on new building supply, particularly in relation to its negative impact on the CBD office sector, there has been little said about the contraction in demand across all commercial property sectors during the global financial crisis.

"These changes have to be considered to fully appreciate the depth of the occupier downturn and the prospects for recovery."

Moricz says demand for office, industrial and retail premises is driven by distinct parts of the economy. "Their performance, known as the 'underlying drivers of occupier demand', varied significantly during the recession, triggering an equally mixed impact on property demand.

"When combined with property supply and the recovery of these underlying demand drivers, the depth of the contraction in each property sector has significant implications on the speed and magnitude of their recovery.

"In the retail sector the success of property is dependent on the turnover level retailers can achieve in a particular location/property," says Moricz.

"While the recession impacted negatively on retailing, it was the magnitude of new premises coming on to the market in 2007 rather than a demand contraction that contributed most to the downturn in trading conditions.

"Core retail sales in Auckland continued to increase during the past two years and there was demand for retail centre-based floor space in 2009."

He says it was a different scenario in the office and industrial sectors.

"Demand for office space is based on office employment levels. Auckland office-based employment showed consistent growth between 2001 and 2007, averaging 3.5 per cent a year. In 2008 office employment fell 2 per cent and CBRE estimates it fell 2.4 per cent last year.

"Industrial property occupancy is underpinned by the manufacturing, wholesale trade, transport and storage industries, and demand is based on the growth rates of these industries. In contrast to retail and office, industrial demand dropped significantly during the recession and last year contracted by 9.7 per cent."

Moricz says the contraction of office and industrial demand drivers wasn't immediately apparent in the amount of occupied space in those sectors.

"While the amount of occupied industrial space fell last year, it was only a fraction of that implied by the contraction of industrial demand drivers, indicating the extent at which spare capacity has been created through the recession and the level to which existing premises may be under-utilised." He says the overhang of vacant and under-utilised space is also influenced by supply.

"For offices, the relatively moderate contraction in demand was exacerbated by the significant supply of new CBD premises. Conversely, the supply of new industrial premises halved from its earlier peak, but the relief provided by this was only a drop in the bucket compared to the size of the occupier demand contraction."

Moricz says CBRE's forecast for a lift in occupier demand is based on predictions of a solid rebound in growth during the next two years.

Statistics show manufacturing, wholesale and transport storage output increased by around 2.1 per cent in the first quarter following last year's contraction, and recent indicators point to a continued positive environment, particularly for manufacturing. Office-based employment levels are predicted to also improve.

"On the supply side, a number of new CBD offices have been confirmed, or are on the drawing board, to be ready of occupation by 2013. Retail centre supply is low over the next two years but is predicted to accelerate during 2013 and 2014. The growth in underlying industrial demand is projected to exceed supply and is predicted to be particularly strong next year."

Moricz says combining the outlook for supply and demand with the trends experienced during the recession has a number of implications for recovery in the various property sectors.

"For retail centres, supply and demand will be evenly matched. Only a moderate amount of empty space needs to be taken up. This means a quicker recovery as demand improves. By 2012 net effective rents are likely to increase above their previous peak.

"In the office sector, a fairly swift upswing in occupier demand is projected, but the need to find new tenants for empty space left behind as a result of the recession and the large number of new buildings in the pipeline will be a limiting factor to recovery.

"In 2014 rents will be little higher than their early 2009 levels." Industrial demand would bounce back strongly in square metre terms, but it would take a number of years for the empty space to be filled. "The impact of this will be most felt in low-quality stock."