Taking care of business

Corporate New Zealand is mirroring global leads, with business owners actively and creatively enticing employees back to the office and vacancy figures in preferred locations defying talk that the future of the office is in peril.

There is clear evidence that the big corporate players are becoming more comfortable about real estate footprint decision-making in the post-pandemic environment, while smaller occupiers are also recognising the importance of having a company office.

In its (Y)our Space 2022 insights report, Bayleys’ global real estate partner Knight Frank says while corporate real estate sentiment is generally still positive around growth fundamentals, hybrid working experiences have blurred the relationship between headcounts and required office space.

A-grade and prime office stock has fared well, with demand outstripping supply in Auckland, Hamilton, Tauranga, Wellington and Christchurch according to Bayleys’ insights and data team.

“The flight to quality as occupiers seek higher amenity and modern buildings to help draw staff back to the office and, in the case of Wellington, to address seismic risks with older buildings, characterises today’s office leasing market,” says Bayleys senior analyst, Ankur Dakwale.

“That movement to quality was apparent prior to the pandemic, but has since gained momentum as business owners look to strengthen their position in the market from both a commerce and staffing perspective.

“While flexi/hybrid working models will still have a place as we cycle out of pandemic forces, quality remains the defining characteristic of the market and tenant mandates for sustainable buildings are bolstering this trend as stakeholders prioritise environmental, social and governance (ESG) policies.”

This drive to quality has resulted in a two-step market whereby B- and C-grade properties are requiring savvy marketing programmes and higher incentives to mitigate weaker demand.

“Lower quality buildings are at greatest risk of persistent vacancies, with many landlords front-footing this and refurbishing buildings with a focus on revamped arrival lobbies and end-of-trip facilities,” says Dakwale.

“Many are working towards NABERSNZ accredited ratings, but in the interim, energy efficiency initiatives like LED lighting are bridging some of the gap.

“Owners of secondary quality offices are increasingly looking at repositioning their buildings, and in Auckland, where waterfront drift is reigning, landlords are looking to position their buildings towards smaller tenancies.

“Change of use to residential is also being considered, but the weaker housing market has slowed the momentum in this space.”

The powerhouse

To November 2022, overall office vacancy across the key Auckland CBD precincts was 10.9 percent – up on the 10-year average of 8.8 percent.

High vacancy in areas such as the Anzac Avenue and Symonds Street education precincts, given the downturn in international student numbers, is dragging the vacancy average up.

Several of the precincts surveyed by Bayleys’ insights and data team show extremely low vacancy with the Wynyard Quarter at 1.5 percent, Britomart 3.1 percent and the Viaduct – where a number of existing office properties are being completely refurbished – at 4.9 percent.

Rents for premium and prime office space have been rising in Auckland and look likely to keep increasing through 2023, while rents for secondary space will continue to soften.

Lloyd Budd, Bayleys executive director Auckland commercial and industrial categorically dismisses talk that “the office has had its day”.

“While the global work-from-home experiment showed that when prescribed, business could continue remotely, it’s what was lost rather than what was gained that’s important here.

“Business owners are now acutely aware of the need to re-establish strong corporate loyalties and consolidating a culture of connection for high-performing teams.

“They want people back in the office, interacting face-to-face, and being optimally productive so office space needs to have a high level of amenity, be suited to collaborative work models, have strong sustainability credentials and be well-placed for commuting.

“Business owners are demanding flagship workspace that astutely positions them to attract and retain the best personnel.”

Budd says the four crucial office pillars – quality, amenity, sustainability and flexibility – are embraced by seasoned developers that know the office sector intimately and deliver world-class property.

“Those on the supply side of the industry have cultured a detailed understanding of occupier needs and are responding with bespoke space that is driving pre commitments and giving the market confidence.

“In committing to new-build high amenity space, firms like Beca, BNZ, and Deloitte have signalled that the office is core to business growth, productivity and staff retention/attraction.”

City of the future

With office vacancy in the Hamilton market sitting at 6.6 percent in November 2022, the CBD’s rejuvenation on the back of Council-led zoning and infrastructural changes and projected population growth is paying off.

David Cashmore, director Bayleys Waikato commercial says the city has cemented a pivotal place in the economic golden triangle, and emerged as a viable location for a wide range of office occupiers.

“The quality of stock has improved dramatically and there’s been a notable uptick in new-build and refurbished office inventory with a roll call of A-grade stock hitting the leasing market since 2018,” he says.

“A number of office and mixed-use projects are currently under construction and there’s a proposed pipeline of additional new-builds planned for the Hamilton CBD, although some of these have been delayed.”

Cashmore says vacancy rates for prime stock have continued to fall as new developments coming on stream have been constructed for specific, precommitted tenants.

“A-grade stock has a vacancy rate hovering around three to four percent, and the gap in rental values has spread between prime and secondary rents.

“Some of the lesser-quality buildings with low seismic ratings have seen challenging vacancy rates, and supply chain delays and labour force issues haven’t helped the refurbishment story for those landlords with older buildings.”

“However, well-financed developers are looking to set up for the next cycle and to capitalise on the demand for better quality office spaces in the central city.”

Cashmore says central city office rates are holding firm for prime stock, approaching $400 per sqm in some instances, but more typically in the mid-to-high $300 per sqm range.

“Good quality refurbished stock is generally achieving between $220 to $280 per square metre, while secondary and older stock can still be leased for considerably less than $200 per sqm.”

Cashmore points to Harwood House as a good example of a landlord willing to upgrade with a new internal fitout, with the building now 80 percent let at $265 per sqm.

“We’re expecting vacancy rates to remain low in Hamilton as companies encourage their staff back to the office and the commercial world resets.”

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