New data from Bayleys confirms some softening of fundamentals in the office leasing sector, with choice and opportunity emerging for occupiers as a result.
Its latest New Zealand Office Market Update shows a definite two-step rental market across the country.
The well-documented flight to quality has resulted in low vacancy rates and demonstrated rental growth for A-grade buildings, counterbalanced by dated or poorly located stock lagging behind with landlords needing to offer occupier incentives to maintain face rents and occupancy levels.
Quality office space with a high level of amenity is still characterising the sector as occupiers aim to position themselves in modern, well-located buildings to help draw staff back into the office.
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On the investor side, the report says inflation and long-term interest rates appear to be peaking so yields are likely to stabilise after a period of softening.
Agent sentiment indicates the investment market remains relatively weak, despite having a significant correction since 2021.
Commenting in the current edition of the firm s Total Property portfolio, Bayleys national head of insights, data and consulting Chris Farhi says there s been a general rise in office vacancy rates in most markets, with an uptick in sub-lease space, particularly in the Auckland CBD.
"Some of the larger sub-lease opportunities are for modern office spaces within good buildings, where corporate occupiers are downsizing their space footprint for operational efficiencies.
"This is giving the occupier market choice and for some tenants, the opportunity to secure quality space that may otherwise have been out-of-reach."
Bayleys national director office leasing, Matt Lamb says the deceleration evident in the Auckland office leasing sector will be a slow boat to turn around with corporates continuing to review space requirements through the lens of changed work models and a more subdued business environment.
"There's a cross-blended vacancy rate of around 11 percent across the Auckland market, and we ve seen an influx of sub-lease space spring up in the CBD and on the fringes.
"We estimate there is around 73,000sqm of space available in the western frame of the CBD alone, with roughly half of that being sub-lease space as companies have been scrutinising their property commitments and often deciding to drop partial or whole floors."
He says decision-making can be slow, with multi-national corporates being reliant on offshore analysis and approvals, and others delaying major relocation decisions until closer to lease renewal or reviews.
"There will always be competing priorities as companies balance operational costs with capacity to win and retain future business, and potentially grow once the global economic ship is righted."
Luke Frecklington of Bayleys Wellington says the leasing market in the capital is fairly muted, with tenants having the upper hand given the choice of available space and capacity to strike favourable deals.
"The inventory of vacant office space is increasing so if occupiers are coming up to break point or review, it's a ripe market for scoping new premises."
Frecklington says off the back of the public sector shake-up, there's an element of musical chairs as the government s property group backfills and consolidates space across its office portfolio.
"Towards the end of this year and into early-2025, we could see significant amounts of sub-lease space come to the market which will provide opportunity for other occupiers to secure well-located, good quality space with fitout."
Meanwhile the Christchurch office market is in a transitional phase according to Bayleys director of South Island capital markets and corporate leasing, Jesse Paenga.
"The return-to-the-office happened quite quickly in Christchurch, as work-from-home dynamics didn't seem to have the same traction here post-pandemic.
"There's virtually nil vacancy in the A-grade office market, but good opportunity and choice across B-grade space.
"We have half a dozen big occupiers actively scoping A-grade space with floors of 1,000-2,000sqm and waiting for the right opportunity to present itself.
"Corporate occupiers are generally looking to consolidate on to one floor, or a limited number of floors, for efficiency and to foster team collaboration and culture."
Putting the New Zealand situation into a wider context, Bayleys national head of occupier strategy and solutions, Steve Rendall says a report from Bayleys global real estate partner Knight Frank on the Asia-Pacific (APAC) office market shows evident downwards pressure for many key cities in the region.
"However, Auckland, and we can say to an extent Wellington, which wasn t part of the report, have generally outperformed many other APAC office markets on some key metrics like prime office rents, vacancy rates and overall returns.
"Australia and many flagship Asian markets have significantly higher vacancy rates as large corporates have been offloading space."
Rendall says because of New Zealand's comparatively small size on a global basis, it doesn't have a significant volume of large occupiers dominating the market with huge dedicated campus precincts which, when vacated, present landlords with considerable tracts of space to fill or repurpose.
"And, because new office developments here only proceed with long-term precommitments in place for at least 50 percent of the net lettable area, along with confidence that the balance can be filled, we haven't had an oversupply of speculative space that has been seen elsewhere in the APAC region."
For the full Bayleys insights report on the office sector, go to:
bayleys.co.nz/insightsanddata/new-zealand-office-market-insights-2024
- Supplied by Bayleys
