After the quake: Wellington’s office market

December 7, 2016 / By  

When the magnitude 7.8 earthquake struck just after midnight on November 14, the small New Zealand town of Kaikoura was worst hit. It was almost completely cut-off as the quake destroyed the main roads and the railway line.

Aftershocks continue to rumble through the top of the South Island and Kaikoura is slowly being reconnected to the outside world.

As the crow flies it’s just over 150 kilometres across the Cook Strait from Kaikoura to Wellington – New Zealand’s capital city. Wellington sits in the region of highest seismicity in New Zealand, with active faults running through highly populated areas. Early Maori settlements in the region were affected by earthquakes and there were more in 1848, 1855 and 1942.

Wellington is a compact city, built around a harbour and surrounded by hills. In the early hours of November 14, those hills were full of sleepy Wellingtonians who had piled their families into cars and headed for higher ground, in case of a tsunami.

Thankfully the big wave didn’t come. People were told to stay away from the city that day while buildings were checked, but when dawn broke it was clear that Wellington’s CBD had come through relatively unscathed.

For many Wellington businesses, life continues as normal. Most buildings withstood the shakes with minor damage. But there are at least four main office buildings that were seriously damaged and are now out of commission.

Before the earthquakes, rents appeared to have reached a plateau after a strong growth period and landlords were starting to offer incentives to attract or retain tenants. The market was projected to be tenant friendly over the medium term.

Government departments are one of the main tenants in Wellington and the Government is in the midst of a long-term project to reduce its spend on accommodation. Many departments have been consolidated into new spaces, leaving vacancies in the CBD that were taking time to be absorbed.

There was also a trend towards converting vacant office stock into student accommodation or apartments. In short, Wellington’s office footprint was shrinking while vacancy was increasing.

Now, things are different.

The quake has turned the Wellington office leasing market on its head. A number of tenants have had to scramble to find new space. Landlords now hold the balance of power and will do until new supply hits the market, which is likely to put upward pressure on rents for existing space.

After seeing what happened in the big Christchurch earthquakes of 2010 and 2011, many Wellington building owners had already set about getting their buildings seismically strengthened. Those properties that are at least 100% of the New Building Standard (NBS) will be even more popular now, as businesses look for a new place to call home.

The pressure is now on building owners whose assets have not performed well to have them brought up to standard or face prolonged periods of vacancy and action from the local council. Thankfully, it looks as though only a handful of owners will have to demolish and start again, but the strengthening process for existing buildings is still a costly and time consuming operation.

In Christchurch, we saw the emergence of an ‘as is, where is’ market for damaged buildings after the big quakes, where properties are transacted without insurance at a heavily discounted price. The purchaser can either opt to repair the building or demolish and start anew. Perhaps the same will be seen in Wellington. The cost of bringing some buildings up to standard may be too high for some owners to bear.

In the longer term, when insurance companies have settled some of the larger claims for major buildings, the question remains: where will that money be reinvested?  Will Wellington benefit from new, high quality buildings, or will investors take their money to other regions?

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