Magazine article New Zealand Management

The Art of the Possible: A Chronic Shortage of Space in Auckland's Prime Office Market Is Pushing Tenants and Landlords into Thinking Creatively about Leases

Magazine article New Zealand Management

The Art of the Possible: A Chronic Shortage of Space in Auckland's Prime Office Market Is Pushing Tenants and Landlords into Thinking Creatively about Leases

Article excerpt

The city's office market is dominated by exceedingly strong demand and rapidly contracting vacancy rates.

Colliers International commercial leasing manager James MacCormick says the majority of leasing over the past 12 months has been in the prime market, where vacancies have dropped 1.6% to 2.4%. "In the city's three premium grade buildings tenants would be lucky to find any space to lease."

Across the entire Auckland CBD office market vacancies fell just under 1% over the first half of this year to 10.8%.

"... job security and companies expanding and wanting to upgrade," says MacCormick.

Rob Bird, Colliers International commercial leasing director, says in some cases landlords have put money on the table to buy out leases, so existing tenants can expand.

"The lack of office space has made the renegotiation of existing leases important and within those leases the ability to expand and contract space. "And smart tenants whose leases might not be expiring for four to five years will be looking at their options now, given the continuing contraction of quality office space and the rush by businesses to pre-commit to new projects that are marketed well before they are built."

"In many cases it's not about the rent but securing space and structuring a lease which meets both the tenant's and landlord's objectives," says MacCormick.

It can take two to three years to conduct a needs analysis survey of a company's staff, find options for new premises and negotiate a lease to everyone's satisfaction.

"If we can bring a creative lease to the table that benefits both parties then these transactions work, but knowing how the lease will fit in a client's property strategy is the key to making it work for all parties."

Bird says the tight prime grade office market illustrates the trend of tenant flight to quality.

Incentives in this sector are practically non-existent. "The pendulum has swung towards landlords, who are securing premium office space leases with few or no incentives incorporated. And the strong demand is also having an effect on rents."

There have been substantial rent increases on new leases and at rent reviews in the Lumley Centre, Vero Centre and PricewaterhouseCoopers Tower. Top floors have set new benchmarks generating rents at more than $500/[m.sup.2] net.

"AMP NZ Office Trust has secured a lease on level 26 of PricewaterhouseCoopers Tower for $550/[m.sup.2]. We expect rentals in the new BNZ tower will match or better the levels achieved in Auckland's premium grade towers when it's opened in 2009," says Bird.

About 70,000[m.sup.2] of new office space will be completed in the next three years. More than 75% of the space has already been leased.

Three of the six projects in the construction phase will be opened either later this year or early next year. Townscape's 152 Fanshawe Street development, located opposite the all-glass Vodafone headquarters, is up and running, bringing 6520[m.sup.2] of office space to the market.

Quay One and GE Plaza at the other end of town in Quay Park will be finished in March next year. These two buildings will add another 20,116[m.sup.2] of space to the upper echelons of the CBD office market.

Also competing for tenants, says MacCormick, are a number of proposed refurbishments.

Union House is currently undergoing a makeover. When finished, the renovated building will provide more than 6000[m.sup.2] of A-grade waterfront office space.

AMP New Zealand Office Trust has bought 21 Queen Street and plans to invest $60m-$70m creating a market leading environment with the most advanced building services and the highest possible green star rating. The 14,600[m.sup.2] premium grade building will be completed in mid-2009.

Further office supply under construction includes the new Multiplex owned, built and developed Bank of New Zealand headquarters at 80 Queen Street and Westpac Banking Corporation's new head office on Customs Street East. …

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