Christchurch office market poised to do good by its landlords

JLL Commercial Sales & Leasing Broker, Colin Barratt

July 11, 2019

An interesting turn is under way in Christchurch’s office space – specifically, the prime CBD offices.

For months on months we’ve been tracking the downward spiral of the Garden City’s office rents following the post-earthquake spike where rents were artificially high due to the lack of supply, but now it would appear the tides are beginning to turn.

JLL NZ recently released its first quarter Market Snapshot research for the Christchurch office market to paint a clear picture in terms of demand, supply, and asset performance.

This analysis showed office transactions in Christchurch over the first quarter of 2019 were under pressure and still declining.  Prime CBD office rents fell 4.4 percent from $340sqm to $325sqm, while secondary CBD office rents fell even more from $243sqm to $213sqm, a 12.4 per cent decline.

However, the research did infer that the decline is due to level out as the post-quake demand looked to be largely satisfied. The supply and demand curves are just about at equilibrium following a significant drop in the development pipeline this year and with most of the stock that was taken by the 2011 earthquakes now rebuilt.

The result of this has been evident since the report was released. Rental rates have softened to sustainable levels with no new major projects forecast to hit the market – even the several projects that are edging closer to completion in the CBD are already primarily pre-leased by anchor tenants and won’t deliver significant vacancy when they open.

This means that for the first time in a long time, landlords in Christchurch CBD office space are wielding more power as supply is stabilised. While we haven’t noticed any substantial rises in rent as yet, it’s the changes elsewhere that are making waves.

It has become commonplace in the market for building owners to offer incentives like discounted face rent, rent-free periods, or short leases to entice tenants to sign on the dotted line, but increasingly we’re seeing landlords being equipped to hold out for a much fuller market rent while simultaneously not giving as much away.

We are therefore seeing less incentives, longer tenancies, and ultimately, better return rates and building values for landlords in today’s market.

As an example, we leased 420 sqm on Heresford Street recently at $300 per sqm, but the big part of this deal is that there was no incentive needed - something that has been crucial in recent times. Likewise, space on Colombo Street was leased recently at $350 per sqm, and that's about $20 more than what similar properties in similar areas were going for only a few months ago.

Our analysis is obviously focused at the top end of the market, as there is still a relatively high vacancy rate on B and C-grade space in addition to office space out in the suburbs. However, it’s likely to follow the same pattern in due course as the positive effects from the growth in the prime CBD office space filters outwards with opportunities created for tenants that wish to relocate or move up the grade spectrum outside of the CBD.

While it is still in its early stages, the signs are pointing to the Christchurch office market offering more positive returns for its landlords in the very near future.