Strong growth predicted for Wellington
Vacancy for prime office space in Wellington has fallen to just 1 per cent. Photo / Supplied
A reduction in vacancy and rental pressure is continuing to increase in the Wellington commercial property market, with elevated occupier demand expected to underpin a strong
period of growth for the rest of this year, says new research from CBRE.
The agency’s Wellington Viewpoint report reveals office yields have firmed 18 basis points year on year for the first quarter of the office sector, retail 10 basis points and industrial 35 basis points.
Notably, in the office sector overall vacancy fell to 7.9 per cent and prime office to just 1 per cent.
The report says leasing in the wake of last year’s Kaikoura earthquake was seen to be a large contributing factor although some leases were secured pre-earthquake.
Despite the adverse impacts from the quake, the report confirms there was still a total of $207m in transactions over $5m over the six months in the second half of last year.
Richard Carr, research analyst with CBRE Wellington, says with rental rates in both the primary and secondary office markets having increased in the first quarter of 2017, due to the lower vacancy rates, investor appetite has well and truly returned after hesitancy following last November’s earthquake.
“The office market is desperate for higher quality stock than what is available,” Carr says. “Elevated investment levels are expected to continue in Wellington from both domestic and international sources, due to the relatively high returns compared to Auckland. While credit has become difficult to acquire, there is still plenty of liquidity in the market which is looking obtain quality assets.”
In the industrial sector, land values rose to a record $293 per sq m in the last six months, one of the highest values since the global financial crisis. At the same time vacancy fell from 7.9 per cent to 7 per cent in the year to December 2016 while industrial rents continued to rise in the past year - prime by 16.9 per cent and secondary by 23.6 per cent.
“As expected, low vacancy rate accompanied by rising rents are also supporting development agendas,” Carr says.
“Ongoing industrial demand alludes to further rental increases in 2017. These have been
concentrated in the lower end of the market and as a result the rental range between the highest
quality stock and the lowest quality stock is tightening. This compression will also add to the demand for quality space as the rental variance does not incentivise lower quality buildings as much.”
The report says the retail market in Wellington is also continuing to attract new development despite “rental plateauing” in the last six months, noting the pending opening of new boutique retail stores on the corners of Manners and Victoria Sts by the third quarter of this year.
“Despite the resurgence, from an occupier perspective there are ongoing consequences
from the earthquake such as tenant relocations to high NBS [New Build Standard] space which have not been completely resolved.
“Some owners have divergent views regarding the performance and conditions of buildings. This has caused some tenants to relocate from their existing occupancies while still being contractually bound to their leased space – and this has provided downward pressure on city wide office vacancy.”
He says the credit limitations posed by the financial sector may stem new build development putting the focus on refurbishment of existing spaces.
“Repurposing has been common throughout the region, with the conversion of industrial stock to
retail and low quality office to the residential market. It is expected that this will continue to be
evident in 2017.”