Two-speed office market

The flight to quality in the Auckland and Wellington office sectors seen prior to the pandemic has been supercharged in its wake, as businesses return to stability or are actively in growth mode.

Higher quality offices generally have lower vacancies and rising rents, while lower quality offices are facing the opposite with landlords often needing to provide larger incentives to maintain face rents.

While overall benchmark rents are generally stable in both markets, it’s the divergence between higher and lower quality spaces that is of note, and Wellington faces the additional challenge of seismic integrity which is playing a significant role in leasing dynamics.

Rents for new-build A-grade stock are also rising, reflecting construction cost escalation and a softening of the outlook for landlord yields and, as operating expenses escalate for building owners, net rentals are becoming more prevalent.

Reviewing the Auckland office leasing market, Steve Rendell, Bayleys’ National Director of Office Leasing says quality office premises are increasingly being used as a staff retention and attraction tool.

“Smart new-builds with high levels of amenity and optimal locations close to public transport hubs and arterial links are seen as an effective – and necessary – means of getting an engaged workforce back into the physical office after extended periods of remote working.

“In Auckland, there’s been a clear drift to the waterfront precincts which provides higher amenity, in contrast to midtown and uptown which are caught up in disruption from City Rail Link (CRL) construction works.

“Given time, these affected areas will benefit from the improved transport efficiencies created by the CRL, but we expect some marginal office buildings will be converted in the medium term as office use becomes unviable.”

Rendall says finding large vacant floor plates in prime campus-style buildings around the city is difficult, demonstrated by low vacancies in the Downtown, Britomart, lower Victoria Street, and Wynyard Quarter precincts.

“Sublease opportunities occasionally pop up, but businesses tend to be reassessing their need to downscale and choosing to retain space to allow for growth opportunities.”

“Equally, we have also seen outstanding rentals achieved for smaller, fully fitted-out office suites which are appealing to professional services providers, consultants and financial organisations.

“Gross rents have begun to exceed $1,000 plus GST per square metre for smaller, completely fitted suites inclusive of all services in the Auckland CBD market today.”

In the capital, Bayleys Wellington office leasing specialist Luke Frecklington says the flight to quality remains a key definer of the market.

“There’s strong uptake of any new-build office stock coming to the market with premium rents being obtained reflecting escalating cost-on-delivery fundamentals.

“Existing A-grade stock offering large floor plates, high-speed lifts, and good natural light are rare, very much in demand and also attaining premium range rents.

“Across the city, prices per square metre of office space are staying steady or rising, with high seismic credentials non-negotiable and helping to elevate those rental figures.”

Frecklington says the seismic integrity of buildings has facilitated huge displacement of occupiers around the city and has required a lot of market education around the more stringent strengthening thresholds in play and landlord obligations in this area.

“The shortage of prime office space has been compounded by government agencies expanding their office footprints with a definite flight to quality being seen, but we’re also seeing a large number of long-term leases organically come up for renewal or review.

“When this happens, businesses are taking the opportunity to move to better quality buildings that offer seismic confidence and a greater level of amenity which in turn helps them attract and retain staff.

“Despite what the media may suggest, we have not seen businesses wholesale reducing office space or necessarily shrinking their workforces post-pandemic.”

Frecklington says businesses are rotating staff across different cohorts to minimise the number of people in the building at any one time as an interim health measure, but retaining large floor plate to give them options going forward.

While some lower-quality CBD stock has been absorbed for conversion in the residential housing market, secondary-grade city fringe office properties remain popular, particularly with start-ups and creatives looking for affordable yet still well-positioned property.

“These businesses tend to gravitate to character space from an aesthetic and balance sheet standpoint,” says Frecklington.

“Meanwhile, quality serviced office suites are becoming increasingly sought-after by well-resourced smaller business occupiers looking for flexible space and shorter lease terms.”

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