Apartment conversions squeeze office vacancy levels

A combination of a strengthening leasing market and a multitude of significant conversion projects has resulted in a sharp fall in office vacancy levels across the Auckland City fringe business precincts, according to one of the city’s leading real estate agencies.

The latest Bayleys Research vacancy survey shows overall vacancy to have fallen to 13.7% – down from 16.8% in early 2014 and a peak of 16.9% recorded in 2011 when the impact of the global financial crisis and New Zealand’s recession was at its greatest.

Vacancy decreased in four of the five city fringe precincts monitored by Bayleys Research – College Hill, Grafton, Newton and Newmarket. Only Parnell bucked the trend, with its vacancy increasing marginally from 12.9% to 13.1%.

Bayleys Research manager Ian Little says the improvement has been led, as in most areas, by an uptake of higher-quality space.  A-grade vacancy, which stood at 13.8% a year ago, has fallen to just below 7%. 

“The sharp decline has been brought about by a number of significant lettings to tenants – such as Lottery NZ and BP New Zealand. Both organisations have taken space within the new Watercare Services building in Newmarket. Lottery NZ moved from B-grade premises in Grafton while BP has relocated its head office from Wellington,” Mr Little said.

“A further sign of the positive impact which New Zealand’s strongly performing economy is having on the commercial property market is the decline in the vacancy rate of city fringe secondary grade property, even though it is not to the same extent as A-Grade premises.”

The Bayleys Research 2015 survey shows B-grade vacancy down by more than 1.5 percentage points to 14% and C-grade vacancy falling by two percentage points to 20.1%.

“As anticipated, the high vacancy rates which have prevailed since 2011 have resulted in a significant lift in the number of residential conversion projects that are either under way or proposed,” Mr Little says.

“Two of the most significant residential conversion projects in the latest survey are located within the Newton precinct – at 8 Hereford St and 15 Hopetoun St – with developer Tawera Group converting the buildings into high-quality apartments. 

“Both former anchor tenants at 8 Hereford St, Telecom (now Spark) and Auckland Council have moved to new or refurbished buildings within the CBD, and, once conversion works are completed, the property will comprise approximately 115 apartments.  Meanwhile, at 15 Hopetoun St, the previous Baycorp House is being reconfigured into 91 apartments.

“These two schemes have resulted in the total office floor area of the fringe precincts falling by approximately 18,300sq m, which has clearly been a significant contributor to the decline in vacancy rates.” 

College Hill recorded the lowest vacancy rate at just over 5% – down from 7.6% in 2014. For the second consecutive survey, there is no A-grade vacancy within the precinct while the amount of B-grade space available shrank to 2720sq m from 4100sq m – primarily due to lettings to United Chinese Press and Working Giant at 1 Beaumont St and vacant space at 13 Hargreaves St being filled by a number of marketing firms.

Grafton, where vacancy has fallen from 18.9% to 15.6%, has experienced many of the trends evident across the fringe precincts, Mr Little says. Business expansion, refurbishment and conversion projects have all contributed to the decline. 

The owners of 117 Khyber Pass, previously the home of the NZ Lotteries Commission, have embarked on a refurbishment programme, while 10 Lion Place has been removed from the survey as it is being converted to apartment use. Formerly called Access House, the property is being rebranded “The Ivory, Epsom” and will comprise 84 one to three-bedroom residences.

In Newton, which has the highest vacancy rate within the fringe precincts, the occupancy rate has increased to more than 80% for the first time since the global financial crisis. Although still high at 19.2%, the vacancy level is down on the 20.5% recorded in 2014 and a massive 36.3% in 2011. 

In Newmarket, the precinct’s vacancy rate now sits at 14% – down 3.7 percentage points over the last year.

Mr Little says the city fringe market is showing similar trends and patterns to the Auckland CBD office market – where Bayleys Research’s latest survey released last month showed the overall CBD vacancy rate has declined from 11.4% to 10.6% over the past year. 

“Vacancy within upper-grade premises has declined sharply in both markets – with the CBD prime office vacancy standing at just 3.3% and mostly comprising small pockets of space,” he says.

“With the next wave of development still in its formative stage, the total office inventory will not expand significantly in the short term. In fact, further conversion activity is likely. This will pull vacant space out of the market. 

“Coupled with the fact that New Zealand’s economy is forecast to continue to grow throughout 2015, it’s almost certain that there will be further supply tightening across all grades of office property over the course of the year. This will put more upward pressure on rentals – particularly at the upper end of the market.”

Neil Prentice writes for Bayleys Real Estate