COMMERCIAL PROPERTY Commercial Realities – Dollars, sense, bricks and glass

The current state of the market for both leasing and buying commercial property remains robust, especially in the CBD in Auckland and Wellington. Vacancies within Auckland CBD are at historically low level, dropping 0.5 percent over the latest six-month period to 10.2 percent. As result, there is now major trend for landlords to refuse to offer incentives.
This situation is unlikely to change in the short term due to strong economic activity which has continued to encourage take up both in Auckland’s CBD as well as the fringe and suburbs. Over the past few years there has been drift to Auckland’s waterfront (KPMG, Vodafone) and towards peripheral locations such as Newmarket, Greenlane and the North Shore.
Investors will be encouraged by the Property Council of New Zealand’s latest investment index returns just published for the year to June 2005. Auckland’s industrial property market recorded 22.41 percent total return (outperforming the NZX with total return of 21 percent) split almost equally between rental and capital appreciation. The latest figures show commercial property investors have received the highest rate of return in the history of the index.
Market rates are being driven by strong demand for commercial premises. The key issue is that “Auckland CBD tenants looking for quality space continue to have limited options, particularly those looking for larger floorplates”, says Alan McMahon, director, research and corporate services at Colliers International. “This disparity between inquiry and leasing options has supported solid rental growth.”
Not surprisingly, some agents have been quick to talk the market up, advising clients to get in quick because of the shortage of space. But there are two sides to this, says Peter Scott, property leasing strategist from Parallel Directions, who takes more controversial approach.
“In the new building supply there is the premium level with buildings like Vero and the PWC tower but there are also the multi-storey building complexes in mid-phase for the ‘A Category’ list which will fetch around $275 per square metre. In Auckland, these include the Manson building near the railway end of the waterfront, the big Britomart building and the new Crest building behind Vodafone. The premium buildings will cost between $400-$500 per square metre over the next five years which is scary for tenants but the ‘A category’ buildings will attract demand as rents will be cheaper.”
On the supply side there are new buildings being built in Auckland’s suburbs and fringes – Carlaw Park in Stanley Street, office parks in East Tamaki, Albany Centre, and on Ponsonby Road/Williamson Avenue. These new buildings will give tenants the freedom to choose whether to move into the CBD or into suburbs where buildings come with lower rentals, larger floorplates, better access, better car parking and lower operating expenses.
Obviously it pays to do some research on the area chosen before an organisation even thinks about moving. Yet several people in the industry said there was still trend for senior managers to talk to landlords before working out what best suited their business. Companies considering move should focus on the viability of industrial space but also access to their markets.
“If in Auckland, access to consumers and exposure is important. Organisations need to look at the viability of local economies. Each region is different,” points out Daniel Newman, policy manager at the Property Council. “Manukau offers lower rates and constructive partnership with council. But in the North Shore, development in the region contributes to an organisation’s bottom line so there is big contrast. In Albany, for example, businesses need to be familiar with the local environment as there is different mix of rating and regulatory issues.”
When the business community plans for the future it needs to ensure that more land is zoned for non-residential development to cater for job-rich industrial growth. “Currently we are not facing crunch time but it is coming in the next 10 years or so,” warns Newman. “If we don’t plan to set aside more land for business development now it won’t be sufficient to allow reasonable land prices in the future.”
Another trend to emerge is the ‘upwardly mobile syndrome’ that affects buildings as well as people. As big firms grow they move out of medium-sized buildings and take up space in new buildings (Simpson Grierson will be the lead tenant in the new Lumley Centre shortly to be completed). This creates ripple effect causing the market to become upwardly mobile. Many of Auckland’s major tenants have made decisions over the past few years affecting the level of backfill space available (eg, PWC, Bell Gully, Buddle Findlay, Russell McVeagh and Vodafone.)
Market rates have different drivers in Wellington. These include: number of major lease expiries, some representing once-in-20-year window to change the working environment and the way businesses operate; the increasing size of the public sector; growing private sector economy on the back of public sector expansion and Wellington developing businesses in the creative sector; the rapid growth of apartment living in central Wellington – competing for older buildings for redevelopment and sites for new apartment development causing lack of lower grade space. New buildings in Wellington include the one for Statistics New Zealand within CentrePort Business Park (8500m2), the ‘New Defence Building’ (18,000m2) to be completed in 2007, and new building for the Ministry for the Environment at Kate Sheppard Place.
Dean Croucher, managing director of Dow Group, says that Wellington rentals have increased significantly over the past two to three years, from low to high $200 per square metre. Rents for new buildings that were circa $350 per square metre (gross) are now $450 per square metre (gross). “There is generally shortage of options across the market from 1000m2 upwards in particular. number of key decisions by parties will potentially release space for backfill over the next 12-18 months, which will ease the pressure.”
In provincial New Zealand there has been significant uplift in activity and rental levels. Dow Group has acted for Rabobank NZ for the past three years, which has involved setting up 30-site branch network throughout the country. “On the back of strong rural economy and general activity they are now experiencing mini boom. Markets that continue to be tight for modern office premises are Hamilton, New Plymouth, Gisborne, Hastings, Wanganui, Masterton, Blenheim, Nelson, Dunedin and Invercargill,” says Croucher.
While having all the facts and figures at your fingertips might help, this is the wrong way to begin thinking about potential move. “The ultimate test of whether the new premises has met expectation is determining how well the working environment supports what the business is trying to achieve,” explains Croucher. “Improving recruitment, retention, productivity, innovation and collaboration will significantly outweigh the property-related costs if you get the working environment right.
“As result the key difference you can make in looking at new premises is to develop working environment strategy that links the decisions about new premises back to the business. This will drive what sort of premises are needed. Once found, how will we use them most effectively? The process of investigating the organisation and its drivers will in turn assist with developing brief.”
Getting practical, it is difficult to assess how much space an organisation really needs although there are rules of thumb (see box story “Office Relocation”). The key to determining the correct space is developing space budget, as each requirement is unique. Most industry specialists agree that over the past five years companies are moving away from cramming staff into space.
“As competition increases for staff and organisations recognise the link between the working