Flight to quality supports office rental growth in Auckland 

Average prime rents rose 1% to NZD 521 per sqm per annum in Q3 2021.

According to JLL, recent announcements of Deloitte committing to One Queen Street (7,500 sqm) and BNZ committing to the existing Deloitte premises at 80 Queen Street (21,000 sqm) highlights the ongoing occupier demand for the highest quality buildings in prime locations. 

Lower quality offices in the up-town and university precincts however continue to show weak occupancy and slow leasing profiles. 

Here’s more from JLL:

Sublease availabilities are showing signs of stabilising, reducing from around 100,000 sqm to 60,000 sqm in recent months as spaces have either been absorbed, translated into direct leases, or withdrawn. With sublease space proving difficult to lease, we anticipate reduced options coming to market as occupiers and owners increasingly work collaboratively to resolve changing workplace strategies. 

We continue to record notable supply in the short-to-medium term 

The completion of 136 Fanshawe (100% occupancy) during 3Q21 added 20,000 sqm of Grade A stock to the CBD office supply. Meanwhile, the development of One Mills lane (25,0000 sqm Grade A space, estimated completion 2025) and One Queen Street (14,300 sqm Premium space, estimated completion 2023) have also commenced construction illustrating recovery of developer confidence. 

Other notable projects in the pipeline include 3-15 Albert (15,000 sqm new build), 35 Graham Street (24,000 sqm refurbishment), 87 Alberts (14,500 sqm refurbishment) and the final stage of Precinct Wynyard Quarter innovation precinct (around 18,000 sqm across three buildings), all currently in planning stage. 

Rents picked up slightly while yields remain stable 

Rents at the upper end of Premium and Grade A space saw growth in 3Q21 supported by the on-going ‘flight to quality’ trend, as the backfill opportunities have seen occupiers continue to move up the grade spectrum. In comparison by grade, average prime net face rent increased 1.0% q-o-q to NZD 521 per sqm per annum, while average secondary net face rents remained static at 259 per sqm per annum.

While there continues to be strong investor demand, especially for core assets with strong tenant covenants with longer term WALTs, we have kept office yields static across the board due to the changing interest rate environment with the RBNZ starting to firm the OCR in 4Q21. 

Outlook: Decompression of office yields is expected from 2022 

Employment confidence and strong hiring demand in the labour market should support ongoing demand for office space. With persisting occupier preference for quality and location however, we continue to expect a widening gap between prime and secondary occupancy levels. Notable supply of prime grade stock in the short-to-medium term will further place challenges for the secondary stock. 

With the RBNZ starting to firm the OCR in 4Q21, funding costs will be a consideration for investors as they review their investment strategies and medium to longer term returns. Yields are expected to hold steady for the remainder of 2021 with expansion from 2022 in line with rising interest rates.