COLLIERS INTERNATIONAL MARKET INDIC ATORS REPORT
Auckland CBD Office
QUARTER ONE
FOREC AST (6 MONTHS)
|
2009
Slowing Not Stalled
What are the prospects for next year when office vacancies remain low, most new buildings are already leased, big investors are absent from the market and the economy is in a recession? It is a time for consolidation. Despite some companies shelving expansion plans, we estimate there is still demand for 50,000m² to 60,000m² of office space from businesses that want an Auckland CBD address. Although the CBD skyline is dotted with cranes, they are likely to become an increasingly rare sight in the next two years as the diminishing availability of credit, cautious tenant demand and dropping capital values of completed projects combine to make development a difficult proposition. Most of the prime space under construction has been leased with the exception of 21 Queen Street, which is being completely remodelled by AMP New Zealand Office Trust (ANZO). This is one of the few options for large corporate tenants looking for quality office space next year. Since our last report in April 2008 several major tenants have secured new space in Auckland’s CBD. The most recent is professional services firm Ernst & Young, which will move its staff in early 2011 to 9500m² of premium grade space at Cooper and Company’s East Building complex in Britomart. On the downside, when Ernst & Young, Westpac, Deloitte, BNZ and others, move to new premises in the next couple of years they will leave behind empty offices some of which may prove difficult to back fill. Net absorption was negative for the second half of 2008, the first negative result in three years. The overall CBD vacancy level measured endyear at 7.7% was the second lowest rate since our bi-annual survey began in 1995. This followed on from a record low of 7% in the June 2008 survey. As usual, the better quality premises have the lowest vacancy levels. Tenants often find that when they move to high quality premises their total property costs per employee do not rise. Design and services efficiencies in better buildings allow companies to occupy their space more intensively. While the cost per square metre might increase the cost per person remains stable. This drive for efficiency helps explain the continuing steady demand for the best offices.
Overall Performance Supply Tenant Demand Vacancy Rents Incentives Capital Values Yields
KEY FACTS
• Auckland’s CBD office vacancy rate softened slightly over the second half of last year, up 70 basis points to 7.7%. Both prime and secondary vacancies increased to sit at 4.1% and 8.2% respectively as at December 2008. • Major leasing transactions include Ernst & Young, Deloitte and ING New Zealand. • Rents continue to hold firm at the top end, but in secondary property, rental growth will weaken. Effective rents are expected to soften as incentives increase due to cautious tenant attitudes, a softening economy and dropping demand for space. • About 78,000m² of new office space is under construction and due for completion over the next three years. Over 70% of the space has already been leased. • Auckland’s CBD office investment sales have dramatically slowed, with only a handful of major office transactions completed. Both prime and secondary markets yields have eased from the benchmark lows of 2007, shifting out by 0.75% to 1.5%.
Auckland CBD Office Market Indicators - Quarter One 2009
Grade Precinct Gross Rent ($/m² pa) Low 550 400 370 410 460 370 340 340 310 300 340 280 390 320 275 270 240 290 250 250 240 300 High 720 550 400 490 590 400 435 420 370 360 440 320 440 390 340 335 290 340 320 320 270 350 Incentives (%) 0 0-2 0-2 0-2 0-2 0-2 4-8 4-8 4-8 4-8 4-8 6 - 10 4-8 6 - 10 8 - 14 9 - 15 9 - 15 8 - 14 9 - 15 9 - 15 9 - 15 8 - 14 Outgoings ($/m² pa) Low 120 100 100 115 190** 80 110** 90 85 85 155** 80 80 110** 75 75 65 140** 60 60 65 100** High 140 120 110 130 210** 100 115** 120 95 95 165** 90 90 115** 85 80 75 150** 70 70 75 105** Capital Value* ($/m²) Low 5810 3870 3380 3690 4130 3520 3360 2980 2590 2460 2730 2220 3760 2670 2140 2070 1850 2130 1930 1930 1770 2350 High 7840 5550 3630 4500 5550 3640 4520 3570 3160 3030 3780 2560 4240 3390 2730 2710 2280 2550 2540 2540 1970 2810 Market Yields*** (%) Low 7.15 7.50 7.75 7.75 7.50 8.00 7.50 8.15 8.45 8.50 8.35 8.75 8.00 8.75 9.10 9.15 9.20 9.15 9.60 9.60 9.65 9.55 High 7.65 8.00 8.25 8.25 8.00 8.50 8.00 8.65 8.95 9.00 8.85 9.25 8.50 9.25 9.60 9.65 9.70 9.65 10.10 10.10 10.15 10.05
MREINZ
Premium Core Core Mid Town Western A Viaduct Upper Queen Quay Park Core Mid Town Western B Viaduct Upper Queen Britomart Quay Park Core Mid Town Western Viaduct C Symonds Street Anzac Avenue Upper Queen Quay Park
Source: Colliers International Research * Assuming fully leased at market rates ** Includes ground rent component *** Assumes freehold
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Colliers International Market Indicators Repor t
Quar ter One
2009
Auckland CBD Office
Economic Update
New Zealand GDP remains flat
With the US economy in a recession, forecasts for global growth in the next few years are dropping. New Zealand is not immune, nor insulated, from the international turbulence. Economic growth has been forecast to remain flat for 2008 and 2009, with substantial recovery not expected before 2010. The International Monetary Fund (IMF) says global growth for 2008 is predicted to be about 3.7%, a fall of 1.3% on 2007’s figure. It is expected to drop this year to 2.2%. The US and Japanese markets have been the hardest hit by the global slowdown. Japan fell into a recession in the third quarter of last year, the first time since 2001. GDP in the US is forecast to fall to 1.4% in 2008 and -0.7% in 2009, while Japan’s growth is predicted to drop to just 0.5% in 2008 and -0.2% in 2009. Limited direct exposure to US assets has, to some extent, insulated Asian nations from the financial turmoil, but economic growth is still slowing in the region, particularly in North East Asia which has been relatively hard hit. China’s economy is still strong and economists are predicting growth for last year and this year at more than 8.5% annually. Growth in India has moderated with forecasts of 7.8% for 2008 and 6.3% for 2009. Throughout last year New Zealand’s economy softened. Interest rate rises coupled with higher costs of living and rapid drops in residential equity have resulted in declining personal wealth. Businesses too have put expansion plans to one side as credit availability and operating conditions tighten. The economy contracted for the second consecutive quarter in June 2008, down 0.2% following a 0.3% drop in the March quarter. The economy grew 2.6% in the year to June, down from 3.2% in the year to March, but up from 2.4% growth in the year to June 2007. Construction, wholesale and retail trade were the main contributors to the past quarter’s growth contraction, reflecting weak domestic demand. Another factor was a drought affecting the agricultural, primary food manufacturing and electricity industries. Nominal GDP fell 1%. A decline in real expenditure GDP was compounded by higher import prices and lower prices for exports and residential property. Unemployment, which reached a five year high of 4.2% in September 2008 is expected to increase this year as businesses lay off staff to cut costs. Tourism, retailing and residential construction have slowed significantly. Despite the doom and gloom, there is some upside for our slowing economy. Petrol prices have fallen considerably, fiscal policy has eased and lending rates have dropped. The falling exchange rate is also putting in place conditions for traditional export-led growth in the economy over 2010. In the short term however, a lower New Zealand dollar will have a negative impact by contributing to higher prices for imported goods and services. Its real day-to-day effect will be in reducing the potential for further declines at the petrol pump.
Telecom Tower 92 Albert Street, Auckland Alcatel Lucent has leased 2156m² of space in the recently refurbished Telecom Tower. The global communications company has joined anchor tenant Telecom in the four star green rated tower – the first refurbished building to be certified under the Green Building Council of New Zealand’s office rating system.
Reserve Bank drops cash rate for the first time in five years, and keeps dropping
The Reserve Bank of New Zealand (RBNZ) cut the official cash rate (OCR) by 0.25% to 8% in July 2008, the first rate cut since mid-2003. The move came in response to the deteriorating global economy, coupled with growing fears the domestic economy would weaken further, and the increasing cost of off-shore funds for New Zealand banks. Increasing oil and food prices, which limit household spending, also had an effect. The RBNZ then went on to cut the cash rate further in September, October and December by 50, 100 and 150 basis points respectively. Continuing financial market turbulence and a deteriorating outlook for global growth played a significant part in the decisions to reduce the rate. The OCR now sits at 5%. Further cuts to the OCR will be based on emerging developments in the global and domestic markets and any response to the recent rate change.
Inflation rises to 5.1%
The consumer price index rose 1.5% to an 18 year high in the September 2008 quarter, following increases of 0.7% and 1.6% in March and June respectively. Annual inflation now stands at 5.1%, with sharp increases in fuel, food and rates the main contributors. Over the quarter, nine of the 11 CPI groups rose. Food was up 3.7%, housing and household utilities
New Zealand Key Economic Indicators
GROSS DOMESTIC PRODUCT Percentage Change in GDP% Mar-07 1.2
Dec-07 0.9 OFFICIAL CASH RATE Dec-05 Mar-07 Apr-07 Jun-07 Jul-07 Jul-08 7.25% 7.50% 7.75% 8.00% 8.25% 8.00% CONSUMER PRICE INDEX All Groups - Percentage Changes (from corresponding quarter of previous year) Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 2.60% 2.50% 2.00% 1.80% 3.20% LABOUR FORCE New Zealand Job Growth Figures 2006-2008 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 0 29,000 7000 -4000 20,000 New Zealand Unemployment Rate Growth Figures 2006-2008 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 3.80% 3.70% 3.60% 3.50% 3.40% Jun-07 0.9 Sep-07 0.6 Mar-08 -0.3 Sep-08 7.50% Oct-08 6.50% Jun-08 -0.2 Dec-08 5.00%
Mar-08 3.40%
Jun-08 4.00%
Sep-08 5.10%
Mar-08 -28,000 Mar-08 3.70%
Jun-08 27,000 Jun-08 3.90%
Sep-08 3000 Sep-08 4.20%
Source: Statistics New Zealand and Reserve Bank of New Zealand
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Colliers International Market Indicators Repor t
Quar ter One
2009
Auckland CBD Office
up 1.4% and transport up 2%. Communications, clothing and footwear fell during the quarter, down 1.1% and 0.4% respectively. Fears of a global recession and deterioration in world financial markets have triggered falls in international commodity and energy prices.
As weaker short term growth, a weakening New Zealand dollar and lower mortgage rates kick-in, the Reserve Bank now expects CPI inflation to return within the target band of 1% to 3% in the first half of this year and remain there over the medium term.
Employment Trends
Employer optimism takes a dive
The Hudson Employment Expectations Report doesn’t bring good news to a beleaguered economy. The company surveyed 2285 employers across New Zealand for its January-June 2009 report and found that national employer optimism has fallen 18.9% to 7.9% - the lowest level of optimism recorded since the survey began in 1999. optimism came in behind the IT sector. This is down 17.1% on the previous survey. The tourism and hospitality sector had the biggest loss in optimism since the last survey, dropping by 41.8% to sit at -6.8%. Burrage says while there are clearly some sectors, such as tourism, manufacturing and retail, under considerable pressure, other industries such as IT and healthcare remain robust. Demand for skilled employees will continue to be high. All three main centres showed a decline in sentiment. Christchurch replaced Auckland as the least optimistic of the three centres, with sentiment falling 23.1% to 0.3%. Auckland fell 16.3% to 2.8% while Wellington remained the most optimistic, down 21% to 17.9%. Within Auckland, the majority of the industries surveyed had rapid declines in sentiment. The education sector showed the only increase in sentiment up 9.1% to 23.7%, while the advertising/marketing/media sector recorded no movement from the July-December 2008 report. The healthcare (government) sector had the highest level of optimism in Auckland down 3.3% to 42.1%. Tourism and retail sectors, not surprisingly, showed massive declines in sentiment, down 63.8% and 33.6% to -32% and -15.8% respectively. Weak residential construction together with slowing commercial building is weighing on hiring decisions in the construction/property/ engineering sector, with employer sentiment down 11.3% compared to Hudson’s last survey. Employment growth in the industry is now being driven by investment in public infrastructure such as roads and bridges, but this is in turn being constrained by the continued shortage of experienced civil engineers. Overall, 15.1% of employers expect to increase permanent staff over the coming six months.
Auckland Club Tower 34-36 Shortland Street, Auckland Australian listed property trust, Valad Property Group acquired Auckland Club Tower, also known as the Dorchester building, for $30.7 million. The 8178m² building was sold on a yield of 7.8% and includes a seven year leaseback to Dorchester Pacific, the vendor.
Few employers are expecting to increase staffing levels over the next six months, but 59.4% indicated they intend to hold staffing levels over that period. Hudson executive general manager, Marc Burrage, says the results reflect the difficulties employers are having in forecasting future demand. He says the drop in confidence will not necessarily translate into widespread job losses. “The economic shocks of the past few months have battered employers’ confidence and made it difficult for them to confidently forecast demand. We expect employers to regain some confidence after the Christmas period if there is no further bad news. In the meantime, it’s important to keep remember most employers are taking a wait-and-see approach.” Although the percentage of businesses intending to drop staff has risen slightly from 11.5% to 16.5%, the most notable shift is in those employers planning to increase staff levels which has dropped from 38.3% to 24.3%. Of the industries surveyed nationally, information technology sector employers again have the highest level of optimism. This is the seventh consecutive survey in which IT has topped sentiment, despite falling for the past three surveys to a net positive 36.1%. The healthcare (government) sector at +31%
Auckland Permanent Employment Expectations (January - June 2009): by Industry (Comparison with Previous Survey Period)
60% 50% 40% 30% 20%
Net effect
10% 0% -10% -20% -30% -40%
Construction / Property / Engineering
Advertising / Marketing / Media
Financial Services / Insurance
Manufacturing
Tourism & Hospitality
July - December 2008
January - June 2009
Source: Hudson Report - Employment Expectations and HR Trends
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Wholesale / Distribtion
Government
Healthcare (private)
Information Technology
Professional Services
Telecommunications
Retail
Non-Profit
Transport
Education
FMCG
Utilities
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Colliers International Market Indicators Repor t
Quar ter One
2009
Auckland CBD Office
Leasing Demand and Absorption
A view from the top
Professional services firm Ernst & Young is the latest major signing at Cooper and Company’s Britomart development. The company is taking the top six floors in the northern tower of the new $200 million East Building. The East Building complex comprises two towers, north and south, totalling about 28,000m². Ernst & Young has secured 9500m² together with naming rights and will move 500 Auckland staff from its Shortland Street location into its new downtown premises in the first quarter of 2011. It is the company’s first move in 20 years. Ernst & Young’s pre-commitment marks the second major CBD office leasing deal in the past year. Fellow professional services firm Deloitte is taking the top ten floors covering 10,720m², at Brookfield Multiplex’s 80 Queen Street development. Deloitte has secured naming rights for the five star green rated office tower and will relocate to its new offices in early 2010. Deloitte and Ernst & Young, who make up half of the ‘Big Four’ accountancy and professional services firms, will join two of New Zealand’s major retail banks in new headquarters. Bank of New Zealand will take the remainder of the space at 80 Queen Street, while Westpac Banking Corporation has signed a lease for a total of 21,500m² across three structures at Britomart. Westpac will move its contact and operations centre to Britomart Charter Customs – a refurbished, heritage building, and the adjoining new building – in early 2009, while its new corporate head office in the south tower of the East Building will be ready in early 2011. Britomart Charter Customs is the latest certified green star building, awarded a four star rating by the New Zealand Green Building Council (NZGBC) in November 2008.
Britomart Charter Customs 53 Galway Street Auckland Westpac Banking Corporation will move into their new contact and operation centre in early 2009 after securing the space in 2006. Approximately 650 of Westpac’s Auckland staff will move into the new premises, which was recently awarded four stars by the New Zealand Green Building Council.
Auckland CBD Net Absorption v Vacancy
40,000 16%
30,000
14%
12% 20,000 10% 10,000
Vacancy
Net Absorption
8% 0
Dec-03 Dec-98 Dec-08 Jun-05 Jun-06 Dec-04 Dec-05 Dec-06 Jun-07 Dec-07 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Dec-99 Dec-00 Dec-01 Dec-97 Dec-96 Dec-02 Jun-96 Jun-96 Jun-98 Jun-04 Jun-08
6%
-10,000 4% -20,000
Net Absorption (m²) Vacancy (%)
2%
-30,000
Source: Colliers International Research
0%
Quay Park doubles in size
Auckland’s CBD office market experienced positive net absorption last year, with about 27,000m² of space absorbed. Of this, about 24,000m² of space was taken within the Quay Park precinct where two new office developments were opened. GE Money and BNZ moved into GE Plaza and Quay One respectively, while Babbage Consultants has moved into the Quay Park Health building on Quay Street. Other significant leasing transactions include Alcatel Lucent’s move into 2156m² at Telecom Tower, 92 Albert Street, National Institute of Water & Atmospheric Research’s (NIWA)
negotiation of 2591m² in Old City Markets at 39 Market Place in the Viaduct precinct and ING’s commitment to 5713m² at 139 Quay Street in Auckland’s downtown Core precinct. ING is committed to three refurbished existing floors and one extra floor, which is currently being built. The financial services provider has taken a nine year lease with naming rights. While the search this year for new premises for some major Auckland businesses has now translated into leasing deals, we estimate there is still demand for 50,000m² to 60,000m² of office space from companies that haven’t yet found what they wanted.
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Colliers International Market Indicators Repor t
Quar ter One
2009
Auckland CBD Office
Supply
Proposed new tower on the horizon
Shopping centre giant Westfield has been granted resource consent, on a non-notified basis, to build what would be Auckland’s sixth premium grade building, on top of its Downtown shopping centre at the corner of Customs and Albert Streets.
Credit squeeze puts dampener on future projects
Low vacancy rates coupled with continued rental growth had, until the advent of the credit crunch, created a solid platform for developers to plan new office projects across the CBD. About 78,000m² of new office space is under construction and due for completion over the next three years. Over 70% of the space has already been pre-leased. Three major office projects were completed in 2008, totalling 29,600m². Mansons TCLM’s two Quay Park developments came online early in the year, while Westpac’s new contact and operation centre in Britomart was completed at the end of 2008. A number of bigger commercial developments will boost the supply pipeline in 2009, including the new Deloitte and Bank of New Zealand headquarters at 80 Queen Street, IAG’s new headquarters on the former Seamart site in the Viaduct precinct and AMP New Zealand Office Trust’s redevelopment of 21 Queen Street. Supply of new office space will be largely muted in 2010. However, the completion of Cooper and Company’s East Building complex in early 2011 will add more than 28,000m² of premium grade space to Auckland’s CBD office market. Anchor tenants Ernst & Young and Westpac Banking Corporation have taken a total of 23,000m² of the newly built space, leaving only levels one to three in the northern tower available for lease. An additional 140,000m² of speculative development is on various drawing boards, most of which will not be finished until after 2012, if at all, as the global economic downturn slows New Zealand’s growth, and consequently tenant demand across most grades of office buildings.
NZI Centre 1 Fanshawe Street, Auckland The new IAG headquarters is under construction in the Viaduct precinct on the former Seamart site. The Newcrest development will be finished in mid- to late-2009 and is fully leased to IAG New Zealand, which markets its insurance products under NZI, State and Business Partnerships. IAG will join Vodafone, Microsoft and KPMG in Newcrest-developed Viaduct buildings.
Vacant premium grade space has been virtually non-existent over the past two years, with only a handful of smaller tenancies coming to the market. In this time, the meagre supply of premium grade space has resulted in inevitable pent-up demand, exemplified by the successful leasing of Deloitte Centre at 80 Queen Street, two years before it will be completed. Construction depends on tenant precommitment, but when built Westfield’s Downtown tower will pip by a few centimetres the nearby Vero Centre as the country’s tallest office building, and will offer substantially more premium grade office accommodation as well. The proposed 41-storey tower – designed to achieve a five star green rating under the New Zealand Green Building Council – will provide 57,000m² of net lettable area – 50,000m² of premium grade office space and some 7000m² of retail space in addition to underground parking for about 500 vehicles. The innovative use of a side-core design philosophy will boost premium rentable office space beyond that achievable in conventional central-core buildings, with floor plates of about 1500m², of which 1200m² would be column free. The proposed 167 metre tall project will occupy a significant part of the city block, bounded by Queen, Customs, Quay and Albert Streets, in Auckland’s Core precinct and will join two other landmark buildings – HSBC House and 21 Queen Street in that block.
An artists impression of Westfield’s proposed Downtown tower on the site of its Downtown shopping centre on Customs Street.
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Colliers International Market Indicators Repor t
Quar ter One
2009
Auckland CBD Office
Vacancy
Auckland CBD - Stock and Vacancy by Precinct and Grade
PRECINCT / GRADE
Total Market Core Mid Town Western Viaduct Symonds Street Anzac Avenue Upper Queen & Periphery
ALL GRADES
Stock (m ) Vacancy (%) Stock (m2) Vacancy Stock (m2) Vacancy (%) Stock (m2) Vacancy (%) Stock (m2) Vacancy (%) Stock (m2) Vacancy (%) Stock (m2) Vacancy) (%) Stock (m2) Vacancy (%) Stock (m2) Vacancy (%) Stock (m2) Vacancy (%)
2
PREMIUM
88,123 0.5 88,123 0.5 -
A GRADE
267,869 5.3 91,327 8.6 24,528 10.7 31,929 0.0 59,166 1.3 33,280 0.0 6,039 15.4 21,600 9.5
B GRADE
308,861 4.6 146,347 6.0 21,120 0.0 56,219 5.3 18,902 3.5 52,382 2.3 6,575 0.0 7,316 10.1
C GRADE
619,900 10.0 118,467 11.0 125,874 5.5 53,480 10.3 27,062 22.6 103,263 7.3 52,329 12.0 118,131 11.7 12,184 10.2 9,110 17.6
D GRADE
39,517 28.0 258 0.0 2,750 37.6 1,704 78.3 5,185 9.2 29,620 27.7 -
Symonds Centre 49 Symonds Street, Auckland A private German investor bought Symonds Centre for $35.28 million – the second major investment sale involving German investors in Auckland’s CBD in 2008. The University of Auckland recently started a six year lease in the property over 1589m² of space.
Britomart Quay Park
1,324,271 7.7 444,265 6.8 171,780 5.6 144,378 6.6 105,130 7.2 104,967 8.5 57,514 11.7 233,413 10.0 24,798 8.8 38,026 11.6
Source: Colliers International Research
Vacancy climbs to 7.7%
Auckland’s overall CBD vacancy rate softened over the final six months of 2008, rising to 7.7%, the second lowest point since the inception of the Colliers International bi-annual vacancy survey in 1995, but higher than the June 2008 figure. Tenant demand stemming from business growth and expansion, which has fuelled low vacancy levels in recent years, appears to have slowed as the global economic turmoil takes its toll. After falling slightly over the first half of 2008, vacancy levels in prime grade buildings rose 1.6% to sit at 4.1% at the end of last year. Despite this increase, the CBD market will continue to be plagued by a lack of prime quality contiguous office space in the short term. No new, prime grade space for lease in new buildings will be available until the middle of this year. The secondary market’s vacancy levels also increased, up 0.4% to 8.2%. Vacancy rates, which reached a record low of 7% in June 2008, are expected to rise again this year, particularly as a number of new office
developments are completed. As tenants move to their new premises, they will leave behind a substantial amount of secondary floor space. From a precinct perspective, four of the nine Auckland CBD precincts had a drop in vacancy rate. The Anzac Avenue and Britomart precincts recorded the biggest decline in vacancy, falling by 3.1% and 1.2% respectively. Conversely, the Quay Park and Viaduct precincts recorded the biggest increases in vacancy levels, rising by 8.4% and 2.2% respectively. Despite this increase, Quay Park’s vacancy rate is considerably lower than levels experienced in recent years. It dropped by 24.8% to sit at 3.2% in the mid-year survey of 2008 - the substantial drop attributable to the addition of two new office developments, totalling 21,600m². Both projects were fully pre-leased to GE Money and the Bank of New Zealand before completion. About 4000m² of office space is now available for sublease in GE Plaza. Babbage Consultants also moved into the eastern precinct over the first half of the year, leasing one and-a-half previously vacant levels in the Quay Park Health building.
■ Core Precinct ■ Western Precinct ■ Mid Town Precinct ■ Upper Queen Precinct ■ Viaduct Precinct ■ Symonds Street Precinct ■ Anzac Avenue Precinct ■ Quay Park Precinct ■ Britomart Precinct
6 COLLIERS INTERNATIONAL
Colliers International Market Indicators Repor t
Quar ter One
2009
Auckland CBD Office
Key Market Indicators
Window of opportunity
Limited prime grade office space and demand for high quality office premises has, in recent years, seen the pendulum swing favourably toward the landlord, resulting in sustained rental growth. In light of the marked downturn in New Zealand’s economy, the pendulum is swinging well and truly back in the tenant’s favour, with predictability of cash flow becoming increasingly important. In this environment, tenants are demanding flexible lease terms with CPI-based reviews. Incentives are likely to increase as cautious tenant attitudes and the softening economy contribute to a decline in demand for office space. In saying this, landlords are continuing to secure leases for prime grade office space with no or few incentives incorporated. Prime grade incentives currently average between 0%-2% across the majority of precincts. Bigger incentives in secondary grade buildings are now being offered by landlords. In a market shrouded by uncertainty, extended rent free periods and increased contributions to fitouts are being offered by landlords to lure prospective new tenants or keep existing clients. While tenants are more inclined to stay put in tougher times, the incentives now on offer across most property grades and precincts, might lure them into relocating. The pendulum is likely to begin swinging back toward landlords in 2010.
OPI NZ House 7-9 Fanshawe Street, Auckland DNZ Property has leased 255m² on level four in OPI NZ House to TXNZ on an eight year lease term.
Current Incentive Levels and Forecasts - Quarter One 2009
BUILDING GRADE Premium Grade A Grade B Grade C Grade D Grade CURRENT AVERAGE INCENTIVE LEVELS 0% 0-2% 4-10% 8-15% 15-20% 6 MONTH FORECAST INCENTIVE LEVELS 12 MONTH FORECAST INCENTIVE LEVELS
Premium trumps downturn
Quality, as always, reigns supreme in the CBD office market and the dearth of premium grade space is putting upward pressure on rents. Premium grade rents continued to grow last year, although at a slower rate than in previous years. The Colliers International average prime rent stands at $356/m², growing by 4.7% in 2008. With limited premium grade space available for lease and new development timelines being
pushed back, we are still anticipating rental growth this year of up to 2%-3% for the best quality accommodation. Conversely, rental growth across secondary markets is expected to be static in 2009. Effective rentals have already begun to soften across B and C grade markets as landlords incentivise new leases, mindful of a substantial amount of secondary space expected to come back on to the market in the short term.
Auckland CBD Historical and Forecast Net Prime and Secondary Rentals
$380 $360 $340 $320 $300 Forecast
Net Rent ($/m²)
$280 $260 $240 $220 $200 $180 $160 $140 $120 $100
Mar-97
Sep-97
Mar-98
Sep-98
Mar-99
Sep-99
Mar-00
Sep-00
Mar-01
Sep-01
Mar-02
Sep-02
Mar-03
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Prime
Source: Colliers International Research
Secondary
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Mar-09
Sep-09
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Colliers International Market Indicators Repor t
Quar ter One
2009
Auckland CBD Office
Key Market Indicators cont...
Yields soften across all grades
There was a dramatic slowdown in investment sales last year. Only a handful of major office transactions were completed. Buyers and developers have been constrained by the tightening of available finance. Over the past five to six years, Auckland’s CBD office investment sales market boomed and yields tightened, fuelled by unrelenting interest from institutions, private syndicates and more recently offshore investment funds, mainly from Australia and Europe. Seemingly inexhaustible supplies of capital compressed prime and secondary yields to new benchmarks levels. In early 2007, Mansons TCLM’s GE Plaza development in Quay Park sold to German investment fund Hamburgische Immobilien Handlung (HIH) on a yield of 6.43%. Major CBD office investment sales totalled more than $500 million in 2007, of which more than $300 million came from off-shore funds. After a buoyant 2007, overseas investors have left the market, as the global economy enters a recession and the ability to obtain finance becomes particularly difficult. Although there is limited transactional evidence from which to conclude a softening in yields, a number of external influences, including the credit crunch, uncertainty around financial markets and cautious investor attitudes have dampened the investment market. We estimate that prime and secondary markets yields have eased from the benchmark lows of 2007, shifting out by 0.75% to 1.5%. Yields are expected to stabilise this year at levels which reflect a prudent differential between risk free, prime and secondary rates. lead to much lower total returns for CBD office investors than they have been used to in recent years. However, the market’s ability to avoid over supply will insulate it from the volatility experienced in other jurisdictions. For example, spare a thought for some of the other markets monitored by IPD, who provide these data for the Property Council of New Zealand. Third quarter 2008 UK total returns for all property was -4.8%, as rental growth turned negative in the office market, exacerbating the effect of rising capitalisation rates. In Ireland, total returns for quarter three 2008 was a massive -13.9%, over -50% on an annualised basis. In New Zealand, returns for the year to September 2008, (PCNZ/IPD) show an overall total return across all classes of commercial property at 10.7%, about half what it was for the year to September 2007. Capital growth has virtually stopped in the last quarter, and declined in some categories. New Zealand CBD offices recorded 12.7%, significantly outperforming retail (8.8%) and industrial (8.4%). Auckland CBD offices recorded 12.9% for the year to September 2008, slightly outperforming Wellington over that period.
Former Downtown House 21 Queen Street, Auckland AMP New Zealand Office Trust’s (ANZO) refurbishment and redevelopment of 21 Queen Street is well under way with completion scheduled for 2009. ANZO acquired the building in early 2007 for $33.38 million.
Long way between optimists
Our latest quarterly survey of Auckland commercial property investors and advisers, carried out in December 2008, confirms that confidence is at its lowest ebb since we began these surveys in 2006. As the chart below shows, office investors have been the most optimistic throughout most of this period, but in this survey they are less optimistic than industrial investors. Industrial property is usually the first to start declining in a recession and the first to come out of it.
Total returns to soften
We anticipate softening capitalisation rates with modest rental growth for prime assets, will
Quarterly Real Estate Confidence Survey*
60
40
20
0
Mar-06 Mar-07 Dec-06 Dec-07 Mar-08 Jun-06 Jun-07 Sep-06 Sep-07 Jun-08 Sep-08 Dec-08
-20
-40
-60
-80
Overall
Office
Industrial
Retail
-100
Source: Colliers International Research *Colliers International Real Estate Confidence index is the percentage expecting improvement minus percentage expecting deterioration.
8
COLLIERS INTERNATIONAL
Colliers International Market Indicators Repor t
Quar ter One
2009
Auckland CBD Office
Leasing Market Activity
Analysis of a Deal East Building - North Tower Britomart Place, Auckland
Market Sector: Building Grade: Britomart Premium Grade Ernst & Young 2011 9500m² Undisclosed Undisclosed Undisclosed
Old City Markets 39 Market Place, Auckland The National Institute of Water & Atmospheric Research (NIWA) has leased 2591m² of office space in Old City Markets at 39 Market Place in the Viaduct precinct.
Tenant: Lease Start Date: NLA: Lease Rate: Term: Incentives:
Comments
Ernst & Young has pre-committed to the top six floors in the north tower of Cooper and Company’s Britomart development. The professional services firm has signed up for 9500m² together with naming rights at the $200 million East Building complex, which comprises two towers totalling about 28,000m². Ernst & Young managing partner Rob McLeod says the move reflects the growth of the firm and a desire to offer its people a first class working environment. “We have been studying our relocation options for some time now”, says McLeod. “We had a wide range of requirements to consider and one of the deciding factors was the location. The fact that the Britomart precinct is at the centre of a transport hub will be of real benefit to our people.”
Recent Major Leasing Activity
ADDRESS PRECINCT AREA (m²) START DATE LESSOR LESSEE
Prime
East Building - South Tower Britomart Place East Building - North Tower Britomart Place Deloitte Centre 80 Queen Street Deloitte Centre 80 Queen Street St Laurence House 139 Quay Street Britomart Charter Customs 53 Galway Street Grant Thornton House 152 Fanshawe Street Old City Markets 39 Market Place Gen-i Tower 66 Wyndham Street Quay Park Health 60-70 Beach Road Symonds Centre 49 Symonds Street Telecom Tower 92 Albert Street GE Plaza 8 Tangihua Street Quay One 30 Mahuhu Crescent Telecom Tower 92 Albert Street ANZ Centre 23-29 Albert Street East on Quay 32-34 Mahuhu Crescent Quantas House 191 Queen Street Britomart Britomart Core Core Core Britomart Viaduct Viaduct Western Quay Park Symonds Street Core Quay Park Quay Park Core Western Quay Park Core 13,500 9500 10,720 11,440 5713 8000 1100 2591 2000 2460 1589 5545 14,000 7600 5545 1950 1008 1139 ~2011 ~2011 Jan-10 Sep-09 Sep-09 ~2009 Aug-08 Aug-08 May-08 May-08 May-08 Apr-08 Apr-08 Apr-08 Mar-08 Feb-08 Feb-08 Jan-08 Cooper and Company Cooper and Company Brookfield Multiplex Brookfield Multiplex St Laurence Cooper and Company Townscape Halsey Investments ING Property Trust Brookfield Multiplex SL Quay Park GE Finance 92 Albert Street Mansons TCLM Mansons TCLM 92 Albert Street AMP New Zealand Office Trust Becton Office Fund Robert Jones Holdings Westpac Banking Corporation Ernst & Young Deloitte Bank of New Zealand ING New Zealand Westpac Banking Corporation Allianz New Zealand NIWA Hudson Babbage Consultants The University of Auckland Alcatel-Lucent GE Money Bank of New Zealand Telecom New Zealand Mighty River Power CMA CGM GFG Group
COLLIERS INTERNATIONAL
9
Colliers International Market Indicators Repor t
Quar ter One
2009
Auckland CBD Office
Sales and Investment Activity
Analysis of a Deal Q&V Building 203 Queen Street, Auckland
Market Sector: Sale Price: Sale Date: Building Grade: NLA: Capital Value: Initial Yield: Vendor: Purchaser: Core $33,000,000 May 2008 B Grade 8440m² $3910/m² 7.65% MFS Diversified Group Ben Cook
East on Quay 32-34 Mahuhu Crescent, Auckland CMA CGM, the world’s third largest container shipping company, has leased 1008m², overlooking the Auckland seaport, at East on Quay for six years. The property was sold to Australian investor Becton Office Fund in April 2007 for $26 million on an 8.24% yield.
Comments
MFS Diversified Group sold its Q&V Building (formerly known as the ANZ Bank Building) in May to local property investor Ben Cook for $33 million in an effort to reduce debt. MFS bought the 8440m² 12-storey office building in August 2006 for the same price on a yield of 7.18%.
Recent Major Sales and Investment Activity
ADDRESS Methodist Mission Buildings 360-370 Queen Street Q&V Building 203 Queen Street Anite House 48 Greys Avenue Symonds Centre 49 Symonds Street Telecom Tower 92 Albert Street Massey University House 90 Symonds Street Auckland Club Tower 34-36 Shortland Street 35 Albert 35 Albert Street Southern Cross Building 61 High Street Clubcard House 124 Vincent Street SAP Centre 67 Symonds Street Telco House Cnr Federal & Kingston Streets Radio Network House 54 Cook Street Quay One 30 Mahuhu Crescent Hanover Finance Building 2 Kitchener Street Fonterra Centre 7-9 Pricess Street West Plaza 3-7 Albert Street East on Quay 32-34 Mahuhu Crescent Achilles House & Taspac House 47-51 Customs Street East GE Plaza 8 Tangihua Street Downtown House 21 Queen Street PRECINCT Mid Town Core Upper Queen & Periphery Symonds Street Core Symonds Street Core Western Core Upper Queen & Periphery Symonds Street Western Upper Queen & Periphery Quay Park Mid Town Core Western Quay Park Core Quay Park Core GRADE C B C C B C B D C C C C B A C B C B C A C SALE DATE Jul-08 May-08 Apr-08 Mar-08 Jan-08 Nov-07 Nov-07 Nov-07 Nov-07 Aug-07 Aug-07 Jul-07 Jun-07 Jun-07 May-07 May-07 May-07 Apr-07 Apr-07 Apr-07 Mar-07 SALE PRICE $25,000,000+ $33,000,000 $10,000,000 $35,280,000 $38,750,000 $10,200,000 $30,700,000 $12,250,000 $19,000,000 $12,000,000 $23,700,000 $21,100,000 $10,300,000 $45,500,000 $12,880,000 $38,750,000 $30,000,000 $26,000,000 $15,300,000 $90,500,000 $33,380,000 VENDOR Methodist Mission MFS Diversified Group Greys Ave Trustee GE Finance 92 Albert Street 90 Custodians Dorchester Pacific Kitchener Group Undisclosed Information Sciberras Investments Multiplex Multiplex The Radio Network Mansons TCLM Tololi Kitchener Street Princes Street Property Partnership Landcorp Quay Park Holding Family Trust Manson TCLM Ladstone Queen Street PURCHASER Prince Corporation Ben Cook The New Zealand Mint Private German Investor Private German Investor Private German Investor Valad Property Group Albert Street Projects Robert Jones Holdings Flight Centre Private German Investor Robert Jones Holdings Norak Properties Hamburgische Immobilien Handlung (HIH) Oyster Property Group AMP Property Portfolio
Buckingham Asset Management & Valad Property Group
PRICE ($/m²) 3910 1754 3483 3534 2706 3754 1672 2567 2620 3208 2683 2771 6067 2880 3370 3559 3554 2490 6464 2649
YIELD (%) 7.65 Vacant Possession 7.95 7.90 7.80 7.50 8.49 7.82 7.66 7.40 6.80 8.31 7.50 8.24 6.43 Vacant Possession
Becton Property Group 47 Customs Street Hamburgische Immobilien Handlung (HIH) AMP New Zealand Office Trust
10
COLLIERS INTERNATIONAL
Colliers International Market Indicators Repor t
Quar ter One
2009
Auckland CBD Office
Development Activity
Analysis of a Development Deloitte Centre 80 Queen Street, Auckland
Market Sector: Building Grade: NLA: Lease Rate: Current Status: Core Premium Grade 23,780m² Undisclosed Under Construction Brookfield Multiplex
Westfield Tower Corner of Albert and Customs Streets, Auckland Shopping centre giant Westfield has been granted resource consent, on a non-notified basis, to build a 41-storey office tower on top of its Downtown shopping centre. The 167 metre tall project will provide 57,000m² of net lettable area. Comments
Developer:
Completion Date: Quarter 4, 2009
Deloitte Centre, as the tower will be known when it is completed in late 2009, is being built on the city’s only island site bounded by Queen, Shortland and Fort Streets and Jean Batten Place. Development planning was not all plain sailing. The BNZ bought the Jean Batten Departmental Building and 80 Queen Street sites in the 1990s for a new head office. In 2003, the bank entered into a joint venture with Multiplex. Heritage issues over the Jean Batten building surfaced shortly after. Intense negotiations with the Auckland City Council and Historic Places Trust resulted in Multiplex, BNZ, the council and Historic Places Trust agreeing to a covenant that is registered on the title in perpetuity. The tower design evolved over two years and is a combination of both new and old construction. The 23-storey tower was the first high-rise to be awarded a five star green rating by the New Zealand Green Building Council (NZGBC) and was fully leased two years before completion. Professional services company Deloitte and the Bank of New Zealand have committed to the tower’s office floors for 12 and 15 years respectively. At street level, BNZ will anchor the Queen and Shortland corner, while international premium brands Lacoste, Ben Sherman, Rockport and The North Face will occupy the rest of the retail space.
Recently Completed and Projects Under Construction 2008-2011
PROJECT NAME/ ADDRESS Telecom Tower (Refurbishment) 92 Albert Street Union House (Refurbishment) 2 Commerce Street Quay One Beach Road GE Plaza Beach Road Imperial Building (Refurbishment) 44 Queen Street Britomart Charter Customs 53 Galway Street Ironbank 150-154 Karagahape Road 21 Queen (Refurbishment) 21 Queen Street NZI Centre 1 Fanshawe Street Deloitte Centre 80 Queen Street East Building Britomart Place
Source: Colliers International Research
PRECINCT
TOTAL NLA (m²) 11,000
STATUS
ESTIMATED COMPLETION Q1 2008
OWNER/ DEVELOPER MCS Property Group
MAJOR TENANT PRE-COMMITMENT Telecom, Alcatel Lucent
CURRENT OCCUPANCY RATE 90%
Core
Complete
Britomart
6000
Complete
Q1 2008
Dresden Properties
P & I Services, PFS
75%
Quay Park
7600
Complete
Q2 2008
Mansons TCLM
Bank of New Zealand
100%
Quay Park
14,000
Complete
Q2 2008
Mansons TCLM
GE Money
100%
Core
3400
Complete
Q3 2008
AMP Alternative Assets
Westpac Banking Corporation -
-
Britomart
8000
Complete
Q4 2008
Cooper and Company
100%
Upper Queen & Periphery
~4500
Under Construction
Q1 2009
Samson Corporation AMP New Zealand Office Trust Newcrest Developments
-
Core
13,600
Under Refurbishment
Q3 2009
-
-
Viaduct
9000
Under Construction
Q3 2009
IAG Deloitte, Bank of New Zealand Westpac Banking Corporation, Ernst & Young
100%
Core
23,780
Under Construction
Q4 2009
Brookfield Multiplex
100%
Britomart
28,000
Under Construction
Q1 2011
Cooper and Company
85%
COLLIERS INTERNATIONAL
11
Colliers International Market Indicators Repor t
Quar ter One
2009
Auckland CBD Office
Auckland CBD Current & Mooted Office Development 2008-2013+
60,000 50,000 40,000 30,000 20,000 10,000 0
Proposed
Net Lettable Area (m²)
NATIONAL DIRECTORY
Pl 20 az pe 08 aria Q lB C 2 ui ha 20 ld rt in 08 er gC Q us 3 to 20 m 08 sIro Q nb 4 20 an 08 k -Q 21 Q 1 ue 20 en 09 N -Q ZI C 3 en D 20 elo tr 09 e itt -Q e C 3 en 20 tr Ea 09 Au e st -Q ck Bu lan 4 ild d 20 in St 09 gar Q bu 1 ild 20 in 11 gs ite -2 35 01 C Al 2+ ha be nc rt er -2 y 01 St 9ag 15 2+ e Al II W be -2 es rt 01 tfi St 2+ eld re et D ow -2 01 nt ow 2+ n -2 01 3+ 08 20 -Q 1 se 20 O ne -Q 2 08
To we r
H ou
-Q 1
Te lec o
Colliers International has complete market coverage in New Zealand
WHANGAREI AUCKLAND NORTH SHORE SOUTH AUCKLAND HAMILTON TAURANGA 09 430 3395 09 358 1888 09 488 4777 09 357 9915 07 839 2538 07 571 4125 06 834 0599 06 354 7080 04 473 4413 03 545 6920 03 365 7887 03 441 0790
Q ua y
m
U
ni on
G
Im Br
E
ito
m
ar t
Commitments
Vacancy
Refurbishment
Vacant Refurbishment
NZGBC Rating Awarded
Source: Colliers International Research
Outlook
For the past 20 years Auckland’s CBD office market has been led by tenants and restrained by bankers. This conservative approach has enabled the orderly building of new office developments to largely match demand. As the economy slows and businesses minimise and fix future expenditure as far as possible, it is logical to expect that new development will reduce pro-rata. The low levels of vacancy will not blow out, but as tenants move into the new generation of offices under construction, they will leave behind space that will not necessarily be easy to fill. The overall CBD vacancy rate of 7.7% is the second lowest recorded since we started our surveys in 1995. New premium quality developments, such as the Deloitte Centre at 80 Queen Street and the Britomart buildings for Ernst & Young and Westpac, will house businesses moving from all grades of buildings. In turn these buildings will be filled, and if the usual pattern is repeated it is in the lower grade property that the vacancy will come to rest. Substantial capital expenditure is then required to bring these properties up to a leaseable standard again. In these non-expansionary times, it is a truism that landlords will be careful to choose tenants of substance, who can pay the rent. But this issue also needs to be looked at from the tenant’s point of view. The ability of tenants to contribute capital expenditure to their leased property by way of, say, a fitout, is dwindling. Tenants will typically be asking their landlord to fund that, in return for an improvements rent which represents the amortisation of the cost over the length of the lease. While this is logical, not all landlords will be able to come up with the capital themselves, even if repayments are secured against a lease. Tenants need to think about what their capital expenditure requirements might be through the lease, or on any extension to it, and select a landlord accordingly. Outside the CBD, in areas such as Wynyard Quarter, Fanshawe Street and in Newmarket, there are sites capable of accommodating large businesses, probably more cost-effectively than any CBD site. There are several large CBD sites capable of development on a similar scale, but to attract tenants they will have to provide demonstrably superior accommodation. In terms of value, CBD office buildings are only rivalled by larger shopping centres. Arguably, it is in this high value sector that the market has declined most in terms of liquidity, or investor demand. Overseas funds are out of the market, and our own listed companies are all trading at a discount to asset backing that makes it hard to be competitive. While that situation persists, it will be even more difficult to get a major CBD project off the ground. Economic factors aside, a key issue in forecasting whether a recovery in 2009 is feasible, is estimating where values are now. The few investors active in the market will have a different view of value to owners. If we take as a starting point what these investors would pay now, then we would anticipate that a recovery is likely – that is they would probably pay more in a year’s time as credit markets ease and some semblance of normality returns. However, if we assume current value to be the most recent valuation of a CBD property, then the value in a year’s time might not be higher. Valuations rely heavily on transactional evidence and, of course, there have been few of any substance in the past year in the CBDs of either Wellington or Auckland. They are also subject to various assumptions, one of which is that the parties are a willing buyer and a willing seller. It could be argued that not everyone selling in this market could be categorised as a willing seller.
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