High vacancies don’t signal the death of the office

Monday, 19 May 2025

Auckland’s CBD office vacancy rate is well above the long-term average.

Vacancy rates across Auckland CBD offices have soared to levels well above the long-term average, and the impact of the economic downturn and global uncertainty is to blame.

But it was not just flash office blocks in Auckland that were seeing less tenant demand, attendees at Re-Leased’s annual commercial property industry event in Auckland last week were told.

In his presentation, Infometrics chief forecaster Gareth Keirnan said vacancy rates were increasing across all commercial property types nationwide.

That was because higher unemployment and weakness in consumer spending was having a big impact in the commercial property space.

While office and retail property were most affected, the very high demand for industrial property that had been seen over recent years was unwinding a bit, he said.

Lower grade commercial stock has much higher vacancy rates, Infometrics’ Gareth Kiernan says.

“Our expectation is that vacancy rates are likely to keep going up, and that is likely to continue into 2026 too.

“The problem is heightened in lower grade stock where vacancy rates are much higher, particularly in Auckland, but that’s masked in the overall figures as premium grade rates are still pretty good.”

Auckland’s CBD office property sector had an overall vacancy rate of 15.2% in the first quarter of this year, according to JLL’s latest market dynamics report.

That is significantly up on the long-term average of 9.0%, the figures showed.

Within that, vacancy in secondary office space was 20.6%, compared to a long-term average of 11.8%, and prime office space had a vacancy rate of 10.3%, which was also up on the long-term average.

In contrast, premium grade office vacancy was low at 1.8%, and down from 2% in the previous quarter.

Wellington CBD’s overall office vacancy rate was 8.9%, up on the long-term average of 6.7%. Vacancy in the capital’s secondary sector was at 10.0%, and its premium vacancy rate was 6.7%.

Office vacancy rates in all three main centres are expected to increase further, JLL says.

In Christchurch, CBD offices had vacancy of 4.5%, but that was up on the previous quarter.

Each city’s office vacancy rate was expected to increase further, but industrial property vacancies remained low in each city while retail property vacancies varied around the country, the report said.

At the same time, a recent Westpac report revealed that commercial property transactions had plummeted about 40% from the market peak, and were at their lowest level in a decade.

Speaking at the Re-Leased event, Property Council chief executive Leonie Freeman said some positive economic changes, such as interest rate cuts, were coming through, but the commercial property sector still faced challenges.

Those challenges included uncertainty around seismic standards and costs, sustainability considerations, inequitable fire and emergency levies, and the removal of commercial depreciation, she said.

“The removal of commercial depreciation was a tax grab, and New Zealand is now the only country in the OECD that doesn’t have it. That is a real negative for overseas investors.

“Combined with seismic concerns, particularly in Wellington, it impacts on interest from overseas investors - but attracting overseas capital to this sector is critical.”

Traditional offices are transforming into more flexible workspaces, the Property Council’s Leonie Freeman says.

Meanwhile, in the property development space, it was a challenge to make feasibility stack up even with industrial, Freeman said.

High construction costs and uncertainty around RMA reforms, infrastructure funding and development contributions were playing a part in that.

“But there are still opportunities in a softer market,” she said. “There is a lot happening in the sector from RMA reform and consenting changes, to work around getting more building products into the country, to progress on build-to-rent developments.”

It was also not the end for office space, rather what was happening was a continuation of the decade-long transformation from huge offices to more flexible workspaces, she said.

“But there has been a recognition that working from home damages workplace culture and development. Now, companies want people in the office more but with flexibility, so there’s a drive to get people back into the office.”

For Kiernan, there were some signs of economic recovery, which would benefit the property sector, but his outlook remained cautious.

Lower interest rates made a difference to business and household confidence, but for households feelings of security around the labour market were also important, he said.

Global uncertainty, particularly around US President Donald Trump’s tariffs, is impacting business momentum, Kiernan says.

“We expect unemployment to peak at about 5.3% later this year, and then start trending down, and when it does that will have a positive impact on household spending.”

But for businesses global uncertainty, particularly around the on-off state of United States tariffs, was sapping momentum for investment pick up, he said.

“If businesses don’t know what is happening, they tend to be more reluctant to go ahead with big decisions. That’s a problem because paralysis can set in, and send the economy into a period of stagnation.”

Re-Leased chief executive Tom Wallace said that as a company providing commercial property management software, their goal was to help the industry to boost its productivity.

“We want to help boost our clients scale up effectively, and grow the number of clients and properties on their books without having to boost headcount.”

The way to do that was by harnessing the power of artificial intelligence, and Re-Leased’s new AI-powered property management platform was an example, he said.

“It gives property managers superpowers. It turns tedious tasks into one-click actions, extracts critical data in seconds, and answers lease questions before they’re even asked.”

Property managers could do the transactional tasks of their job more efficiently without sacrificing service quality, and focus on more high-value strategic work instead, he said.