Market tightening shifts power towards landlords

Market tightening shifts power towards landlords

Solid economic growth and increasing occupier confidence has seen vacancy across Auckland’s office market swiftly decline in the Auckland CBD over the second half of 2013.

Research produced by Jones Lang LaSalle shows that office vacancy in the last six months for Auckland CBD (Core and Frame) has moved from 11.6% to 10.5% and vacancy for the overall CBD including the Viaduct is down from 10.5% to 9.4%.

This is both a significant shift in terms of the fall over the period however it also indicates that the market has surpassed the symbolic 10% threshold, often seen as the tipping point between a tenant versus a landlord market.

Strong leasing activity over the period was focused almost entirely in the CBD Core where vacancy fell to 8.9% from 10.6% in 2H2013. The Frame, or the outer area of the CBD saw limited movement and continues to at 14.2% compared to 14.1% in 1H2013. We continue to see a clear preference for quality assets with Prime vacancy moving 160 basis points lower to 5.7% although Secondary vacancy is also now making gains dropping, from 14.6% to 13.5%.

Mark Grant, National Director of Markets for Jones Lang LaSalle, says, “After several years of good conditions for tenants, Jones Lang LaSalle’s most recent vacancy figures indicate that 2014 is likely to tip Auckland’s office market in favour of landlords. Improved economic conditions are finally becoming entrenched and this combined with improving confidence has resulted in a new round of leasing activity, with tenants looking to secure better quality premises. Jones Lang LaSalle’s forecasts suggest that this conditions are likely to trigger an anticipated round of rental increases which should push into prime stock in the first instance with secondary stock following suit through 2015.”

This positive leasing activity is also flowing in to the Auckland fringe areas. Jones Lang LaSalle research has shown that as Prime space in the CBD fills up, tenants are now looking at the fringe as an alternative, pushing rents as they do so.

CBD tenants, who are now unable to seek suitable premises in the CBD, are inevitably going to have to widen their search for accommodation solutions. This is likely to bring the CBD Fringe back into consideration for a number of occupiers that have long sought to locate in the CBD.

Justin Kean, Director of Research and Capital Markets for Jones Lang LaSalle, adds, “Our research has shown a definite firming of conditions in the office market in the CBD Fringe with vacancy falling from 18%% in 2H2013 to 15.7% in December 2013. As better quality options for office occupiers in the CBD Core become scarce we can only expect to see more and more tenants look to move to the Fringe where options still abound. The market is therefore currently at an inflection point where we expect a growing level of tenant demand to begin to look at non-core options.”

“Historic trends indicate that in the CBD Core as vacancy reaches a certain threshold, it becomes almost impossible to satisfy larger (1,000sqm plus) requirements without new development. We have certainly passed that threshold in the current market. These tenants are looking toward better quality space in submarkets such as Newmarket and Mt Eden to satisfy their accommodation requirements.”

Justin Kean, Director of Research at Jones Lang LaSalle, concludes, “The combination of incentives and vacancy indicates that although vacancy continues to fall and incentives are ameliorating we will not see the true balance of negotiating power shift toward landlords until the end of 2014.”

ENDS

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