It’s no secret that ‘A grade’ office space in New Zealand’s major city centres is increasingly hard to come by. Why’s that? Partly due to the deep pockets of Australian investors, partly because land and local government compliance costs are deterring developers, and partly because of an ever-expanding Government, say real estate sources.
“Growth in the public sector has really put the squeeze on commercial office space in Wellington,” says Neil Prentice, communications manager for Bayleys Realty Group.
Ross Pickett, managing director for property management firm DTZ, agrees tenancy requirements from Government are “very big” and says Australian investments in Auckland commercial properties have roughly doubled in the past 12 months. In Wellington, renovation of old buildings rather than the development of new ones is the norm, he says.
Pickett says it’s hard to source good property for smaller buyers because large investors with money are “just ploughing on in”.
Peter Herdson, director commercial sales for Colliers, says there’s so much money out of Australia looking for home, yields are staying low when historically they might have started rising. And John Urlich, commercial manager for Auckland property specialists Barfoot and Thompson, says “a great number” of Australians are paying premium for top quality, well-located properties.
“Second tier properties are being taken by smaller investors because they know they can always lease good quality stock. [This] is setting new benchmarks with respect to yield and interest rates,” says Urlich.
Alan McMahon, director research and corporate service for real estate firm Colliers, says while the office vacancy rate in the Auckland CBD is over 10 percent, the rate for good quality buildings is closer to three percent and for “really good” buildings, it’s virtually nil.
“Rents for those have gone up fast – by eight to 10 percent,” says McMahon.
Urlich notes that large institutional investors strive to be more competitive by securing larger holdings, meaning smaller businesses have to locate to fringe locations. Yet for practical and image reasons many businesses want to locate centrally. Now popular Auckland CBD fringe areas like Ponsonby, Parnell, Newton and Eden Terrace are feeling the squeeze too, says Urlich.
So where are the new buildings? Herdson says despite demand, the property development market is more conservative than it was 15 years ago. Then, higher risk buildings were going up unleased, now they’re pre-leased and committed and more carefully designed and put together, he says.
Local governance
Many in the real estate community blame local and central Government for the caution surrounding commercial development in New Zealand. Urlich says regional councils have made commercial development increasingly onerous, with deterrents including design and noise control regulations, development levies, the need for public consent, and lengthy notification processes. These issues are exacerbated by lack of available land.
“Development is high risk business more than it’s ever been under the current regulatory environment. lack of available land out west [in Auckland] is certainly an issue and in South Auckland, businesses have to go farther and farther out,” says Urlich.
Peter Dow, director for property consultants Dow Group, says he is astonished by the lack of coordination between local government agencies and those impacted by commercial development, and says the Auckland Regional Growth Strategy is little more than “turf war” between Auckland’s mayors.
“Transit, health boards, telcos, water companies, police, fire, schools and universities all have symbiotic relationship with the development community – master plan for Auckland therefore needs to be an informed master plan. But lot of the responsibility for planning seems to sit [solely] with local authorities. These people no more understand the needs of the development community than I could fly to the moon,” says Dow.
Bayleys’ Prentice says the mayors of Manukau, Auckland Central, North Shore and Waitakere cities are all applying to the Auckland Regional Council to have their metropolitan urban limits extended to free up additional business land.
“There appears to be some resistance from the ARC to this,” says Prentice.
In August, New Zealand Herald report quoted two of Auckland’s mayors opining that the Auckland Regional Growth Strategy was out of date, “throttling” economic opportunities and needed overhauling. Manukau mayor Sir Barry Curtis said strategies to strengthen existing commercial centres in his region had failed and the creation of metropolitan urban limits had cut off access to new business land. Waitakere mayor Bob Harvey said he was impatient with the lack of progress on potential new development areas at Westgate, Whenuapai and Hobsonville.
“It’s like operating in sardine tin,” Harvey told the Herald.
What businesses want
Exacerbating the problem of not enough commercial land is the trend for businesses to want bigger ‘floor plates’ and higher ceiling studs. For example, distribution centres are now requesting buildings up to 15 to 17 metres high, compared with requests for eight to nine metres five years ago.
“Now 5000 to 10,000 square metres is not big; in Wellington there are about half dozen projects of 15,000 square metres or more and Auckland has three to four,” says Dow.
Auckland office park developments such as those in the HighBrook area, Albany Mega Centre and other parts of the North Shore attempt to deliver, but are acknowledged fringe areas of Auckland and not all businesses want that. Those that do may be solving transport problems around getting staff and customers in and out of the Auckland CBD with their sanity intact.
Ross Pickett says businesses are more prepared to go to the fringe if there are car parking and transport issues – and staff may not mind with the launch of new shopping complexes in these areas. Barfoot’s Urlich adds: “Much is made out of the need for buildings to be green and environmentally friendly (see box story “Green with envy?”) but for most businesses, it’s car parks that are still critical.”
The consultants say decentralised office parks continue to work for lease or buy by corporate companies and may have to work for location sensitive businesses unable to cope with the cost of central city transport, car parking, rates and lack of space.
“Rest assured that HighBrook’s business park will be success, Albany will remain popular, and office parks like those on the south side of Rosebank Road [in west Auckland] are set to expand,” says Urlich.
Make plan
So what’s homegrown business with modest cashflow to do? Dow says businesses need to embark on “detailed discovery” of their needs and business outcomes before looking at “the property response”. Too often, he notes, that process is left to middle managers without sufficient knowledge of the business.
“The agent asks ‘where would you like to be?’ and the managers give an off-the-cuff answer because they haven’t really thought it through. You wouldn’t sell can of baked beans using that strategic approach,” says Dow.
He says the sales-focused approach of the real estate industry together with the specialist language agents use doesn’t “cut the mustard” either – agents need skills in business relocation and consulting, and the ability to think laterally and speak in business terms.
“We are conservative industry that talks about ‘yields and returns’ and doesn’t like change,” says Dow. He estimates that six to 12 percent of business operating cost is real estate, with the cost of people closer to 80 percent. Any new environment therefore needs to get the best out of its people.
“Cynical Gen Y will decide the environment they want to work in; it’s about subtleties like whether there’s gym or place to meet friends for lunch,” adds Dow. He says CEOs are increasingly aware of the need for spaces
