With light at the end of the tunnel shining brighter now that the Omicron peak has passed in an increasing number of countries, the conversation is inevitably turning to how its influence on property markets will impact future performance, Colliers reports
What is becoming clear from the data we are collecting is that while some long-term trends are back, occupiers, investors and developers will need to blend new trends into their strategies for 2022 and beyond.
National surveys conducted by Colliers Research over the past two years clearly illustrate a rise in office vacancy rates.
Auckland CBD’s office vacancy rate increased from 4.7% in December 2019 to 10.9% in December 2021. Auckland’s metropolitan office vacancy rate reached 8.1% in March 2021, having sat at 4.7% two years earlier.
In Wellington, where the market is strongly underpinned by government occupation and the level of inventory is influenced by the removal of stock for seismic strengthening, the rise in vacancy has been less pronounced, but still evident. The overall vacancy rate at 6.3% remains slightly above the cyclical low of 5.9% recorded in mid-2019.
But looking at the shifts in vacancy trends at a more granular level, the peak in vacancy has already passed in Wellington with the overall rate declining from 6.7% to 6.3% between June and December 2021.
In the Auckland CBD and metropolitan office markets, the rate of increase in the overall vacancy has slowed over the last 12-month survey period. Auckland’s prime vacancy rate has already reduced. This indicates the worst of the vacancy rate hike is likely over and therefore 2022 will become a pivotal year of change.
The office provides many advantages from a workplace perspective in that it promotes collaboration, innovation, creativity and productivity and strongly supports the building of company culture. However, these features work best when the working environment is at its best.
This is not just a discussion point as it is already apparent in leasing activity and vacancy data over the past six months. While secondary vacant space is languishing, high quality, flexible and environmentally friendly office premises are outperforming.
It is the strong demand for prime space that is turning the tide on the lift in overall vacancy rates, enabling the peak in vacancy to be reached and a downward trajectory just around the corner.
It is therefore the flight to quality trend that shines as arguably the most prolific illustration of the consequence of COVID-19 on office space demand, and there is no going back now. It will be an ongoing influence upon office market demand dynamics well into the future.
What about remote working?
Vacancy rate peaks highlight confidence in the physical presence of office space for businesses. However, over the past two years, it has also become apparent that remote working provides its own set of advantages.
The opportunity cost and pricing of commuting is a key factor, especially in a high inflation environment, as well as the flexibility and autonomy remote working can provide employees.
Many also purport a work-life-balance can be maintained without any loss in productivity, especially if trust, communication and transparency are adhered to.
While the workplace of the future will therefore involve remote working, it is most likely that it will predominantly materialise as a component of the hybrid working model, where people work in offices and remotely, not one or the other.
This will also lead to an increase in the multiplicity of leasing structures emerging for occupiers, such as ‘hub and spoke’ and the greater utilisation of flex space operators. However, first things first. Businesses will need to ‘earn the commute’ of their staff again after long periods of non-office-based activity.
Industrial demand drivers have been phenomenal
In contrast to the office sector, demand drivers within the industrial market have strengthened over the last two years with vacancy rates remaining at or near historically low levels.
In Auckland, overall vacancy now sits at just 1.9% with leasing options an extremely limited occurrence for an extended period of time. In Wellington, overall vacancy currently sits at 2.0%.
Once again COVID-19 enforced lockdowns have been influential. Logistics companies have experienced sharp increases in demand fuelled by a significant increase in online shopping.
According to figures released by New Zealand Post, the value of annual online shopping increased by 54% between 2019 and 2021 to reach $7.7 billion.
While this rapid rate of growth is unlikely to be repeated, the COVID-19 pandemic has brought about considerable change to people’s spending methods.
Online shopping’s popularity has grown and will now be a part of many more people’s lives due to COVID-19.
