Rents not high enough to justify building: JLL

Jones Lang La Salle has put out a report called Auckland office supply puzzle.

In it, it looks at the rental levels required to justify new development in Auckland’s CBD, using predominating costs, land values and yields.

The report says premium office buildings would need to rent for between $560 and $570 per square metre to make their $2600 to $2800 per sq m construction cost pay off, about 13% more than is currently being achieved.

It considered a premium office building to be more than 25 storeys.

“Premium assets, although benefiting in the current tight market, are currently achieving rental levels below that required for new development.”

The report said that JLL anticipated sifniciant rental growth over the medium term, and in 2016 rents would reach the point where development would pay off for premium buildings. Grade A buildings, such as mid-rise office developments, were not likely to be triggered this cycle in Auckland, except as an accepted loss maker.

It said fringe CBD assets already were at the rental return level needed.  “Given the economics of development in the fringe and the level of land being released in this sub market, we expect the fringe to provide the majority of new office stock over the medium to long term.”