Presence of government tenants remains a key demand driver

• For the first time since 2Q21, vacancy in the CBD increased from 3.3% to 3.8%, representing an additional 5,719 sqm of available space. For CBD Core, vacancy increased from 3.8% to 4.1%, due to a few partial floor vacancies at Willis Street and Manners Street. For Thorndon, vacancy increased from 0.2% to 2.1%, due to four full-floor vacancies at Aitken Street.
• Prime vacancy increased from 1.3% to 1.8%, while secondary vacancy increased from 4.3% to 5.0%. Although vacancy increased for the first time since 2Q21, with the presence of government tenants as a key demand driver for office space, prime vacancy is expected to remain in this low range. During the next few years, prime vacancy is expected to remain sub-2.0%.

All new prime completions 100% leased

• There were two completions for 2H22, being 40 Bowen Street and 15 Customhouse Quay. The Willis Bond development at 15 Customhouse Quay is leased to Bell Gully, JLL, Servcorp and the Eye Institute. Precinct’s 40 Bowen Street is leased to Ernst & Young, Fujitsu, Simpson Grierson, Dentons, Aspect Furniture, and restaurants Little Astoria and Nam Nam. Generator is occupying the first two floors.
• Developments that are expected to be completed during 2023 are 44 Bowen Street (the last building among Precinct’s Bowen Campus redevelopment), 1 Whitmore Street (BNZ building, 21,664 sqm) and 360 Lambton Quay (5,000 sqm).

Rents continue to grow with yields softening

• Average gross rents for prime office space increased by NZD 7, recording NZD 635 per sqm per annum (+1.2%), while that for secondary increased by NZD 4, recording NZD 389 per sqm per annum (+1.3%). Average gross rents for Thorndon and Te Aro increased in 4Q22, after staying unchanged for six months, recording at NZD 423 (+2.4%) and NZD 308 (+2.5%) per sqm per annum respectively.
• Average net prime yields softened by 41 bps to 5.73%, with average net secondary yields softening by 34 bps to 7.50%. There were two notable transactions, being 44 The Terrace, a 10,354-sqm property which sold for NZD 48.0 million, and 61 Molesworth Street which was bought by Precinct Properties, with plans to develop it further.

Outlook: Performance is bifurcated and in favour of best-in-class assets

• Local investors and developers are taking time to assess investments amid local and global uncertainty, softening of yields and inflationary pressures, which have all contributed to a slowing down of activity. Another reason for this slowed activity is that operating expenditure (OPEX) increases are putting pressure on capital expenditures, as investors continue to assess their priorities. 
• OPEX costs are expected to remain high until the backlog in pandemic-caused labour shortages is filled in. On the other hand, with the New Zealand dollar expected to appreciate against the US dollar during 2023, making New Zealand-based assets cheaper, overseas investment interest in office properties in New Zealand is expected to rise.