APPD Market Report Article

Wellington

December 1, 2021

4.3%

NZD 612.5

Growth
Slowing

Structurally low vacancy continues to define the market

  • The Wellington office market has rebounded strongly during 3Q21 supported by the imbalance of the persistent lack of stock and ongoing demand for quality space. While some corporates have reduced their workspace requirements which increased the availability of sublease space, much of this accommodation is being absorbed by private and government occupiers, or has been withdrawn.
  • Our most recent 1H21 vacancy survey illustrated a fall in Wellington core (CBD and Thorndon) office vacancy from 7.6% to 5.1% 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 as a key demand driver, prime vacancy is expected to remain low.

Notable supply to enter the market in 2022/2023

  • Across the CBD core and Thorndon precincts, total stock decreased from 1.16 million sqm to 1.14 million sqm during 1H21 as stock withdrawals for refurbishment or conversion continue to outpace addition of supply into the market. Limited supply in a way has helped to keep vacancy low and support steady rental growth for the overall Wellington office market.
  • We are, however, expecting an influx of Grade A completions during 2022/2023, most of which are already fully pre-committed. Notable projects include 8-14 Willis Street (12,300 sqm, 100% preleased), 40-44 Bowen Street (22,000 sqm, 100% pre-leased), 1 Whitmore Street (17,500 sqm, 100% pre-leased), and Wellington Archive Building (15,000 sqm).

Rents continue to rise while yields remain stable

  • The quarter represented the second consecutive quarter of gross rental increase for Grade A offices, which lifted to AUD 613 per sqm per annum from AUD 605 per sqm per annum last quarter. Gross rents ranged from AUD 535-690 per sqm per annum, with the lower rental rate increasing by AUD 10 per sqm per annum from 2Q, driving the increase in average prime gross rents.
  • Secondary rents also enjoyed growth supported by low vacancy in the market generally. Average secondary gross rents increased 3.1% from AUD 360 to AUD 371 per sqm per annum, representing a range of AUD 293 to AUD 450 per sqm per annum. Secondary incentives however also increased to 7.2% (previously 6.2%) as secondary landlords look to maintain face rental growth and retain/attract tenants.

Outlook: Notable backfill space expected in 2022/2023

  • With notable supply expected in 2022/2023, unprecedented backfill opportunity will be provided with occupiers able to move up the grade scale. While we anticipate prime grade vacancy to remain supported, secondary office assets are expected to face upward pressure in vacancy as well as challenges to retail tenants in an increasingly more competitive market.
  • Looking forward, we are expecting to see rents for space in the upper grades continue to increase, especially as the new higher quality buildings are completed. As for investments, outlook remains steady in the short term with yields forecasted to decompress from 2023 in line with rising interest rates.

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

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