APPD Market Report Article

Wellington

August 26, 2022

Gavin Read, Head of Research, New Zealand

2.9%

NZD 623

Rents
Rising

Structurally low vacancy continues to characterise the market

  • Structurally low vacancy continues to characterise the Wellington office market, particularly on the upper end of stock. The results of our most recent 1H22 vacancy survey illustrated a marginal fall in Wellington core (CBD and Thorndon) office vacancy from 3.3% to 3.2%.
  • With the presence of government tenants as a key demand driver for office space, prime vacancy is expected to remain low while secondary vacancy may face some upward pressure as increasing back-fill vacancy is expected, due to developments completing. Vacancy in CBD Core stands at 3.9% while vacancy in Thorndon stands at a meagre 0.2%.

Low vacancy stimulates a supply response

  • A 11,800-sqm Grade A office building, 8-14 Willis Street, was completed during 2Q22 and was 100% leased. There is also a pipeline of several developments under construction in the CBD, with these being a combination of new builds and refurbishments.
  • While the NLA of several of these buildings is still unclear, the total estimated cost of all these buildings exceeds NZD 302 million. Several of these developments are largely pre-tenanted, such as Bowen House, Site 9 and Archives Building, and BNZ Building.

Rents remain constant in the quarter but are expected to grow

  • Gross average rents for prime buildings remained at NZD 623 per sqm per annum, after a rise of NZD 5 per sqm in the previous quarter, with secondary gross average rents also unchanged at NZD 381 per sqm per annum. Average gross rents for new builds increased by NZD 15 per sqm to reach NZD 710 per sqm per annum, reflecting increased construction costs and ongoing inflationary pressures.
  • There were no major transactions recorded in 1Q22 for this market. 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 sixth consecutive quarter.

Outlook: Strong fundamentals to sustain robust demand

  • It is believed that the peak of Omicron cases has now passed, and employees have started to return to the office. However, the focus of a post-pandemic world is on collaborative spaces and hybrid working structures, as opposed to the concept of structured working hours and fixed desks as seen in the pre-pandemic era.
  • Quality office spaces will remain key for occupiers as part of their strategy to retain and attract quality staff. With the borders now open, there is an expectation for offshore investment to increase along with the return to the workplace, which will see occupancy levels rise.

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

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