APPD Market Report Article

Wellington

May 31, 2022

4.2%

NZD 623

Rents
Rising

Low vacancy continues to characterise the market

  • Structurally low vacancy continues to characterise the Wellington office market, particularly in the upper end of stock quality. 2H21 vacancy reflected a fall in Wellington’s core (CBD and Thorndon) office vacancy from 5.1% to 3.3% overall.
  • In comparison by grade, prime vacancy dropped from 1.8% to a mere 0.9%, while secondary vacancy also decreased substantially by 320 bps from 10.2% to 7.0%. With the presence of government tenants underpinning demand for office space and new stock completions in the short term pre-leased, vacancy is expected to remain low.

Strong pipeline of mixed-use developments underway

  • No new project completions were recorded for 1Q22 for Wellington CBD office. The most recent completion was the refurbishment (seismic upgrade) of the 3,000 sqm Precinct Properties building at 30 Waring Taylor Street, where Generator now has a flexible workspace.
  • There is a pipeline of 11 new developments for this precinct in our database. Five among these are mixed office/retail developments, one is mixed office/apartment development. While the NLA of several of these buildings is still unclear, the total estimated cost of all these buildings exceeds NZD 556 million.

Interest continues for high quality stock in good locations

  • There was one deal which awaits OIO approval, the sale of five office buildings by Precinct Properties to Singapore’s GIC. Three out of five of these buildings are in Wellington, including the Defence House, Charles Ferguson Building and Mayfair House. This confirms the view held that the opening of borders will see an increase in offshore capital investments into New Zealand.
  • From an investment perspective, investors remain interested in acquiring new or strengthened office stock in good locations, or value add properties with good opportunities. There is, however, limited available stock to transact, which has kept yields unchanged for the fifth consecutive quarter. In 1Q22 we continue to record prime gross yields at an average of 5.25%.

Outlook: Market poised for notable changes over the next few years

  • Similar to Auckland, despite the interruptions from lockdowns, the office environment remains integral to corporate strategy. The Wellington office market is poised for some notable changes over the next few years, with stock currently under construction set to be completed in 2H22 or 1H23.
  • With much of this stock being Grade A space and generally as the properties entered construction phase with high levels of pre-leasing, the trickle-down effect in lower grades is expected to be significant. Backfill space becoming available at this time will allow occupiers the opportunity to move up the grade scale, which over time is expected to increase vacancy among secondary stock.

Note: Wellington Office refers to Wellington's CBD office market.

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