The resilience in demand and supply fundamentals in Wellington’s CBD office sector has shone through strongly, outpacing Auckland CBD metrics on many fronts.
That’s according to the latest round up of office research on Auckland and Wellington CBDs released by Colliers in the past few weeks.
A review of occupancy and development activity show just how tight market conditions have been in Wellington, as well as the flight to quality trend in both cities that is leading to a flurry of new developments ahead.
Chris Dibble, National Director of Research at Colliers, notes overall vacancy declined in Wellington’s CBD in the six months between surveys, influenced by ongoing leasing activity, particularly at the prime end of the market. This was bolstered by a reduction in total office inventory as owners look to improve seismic ratings and cater to the demand for high-quality premises.
Start your property search
“In contrast to Auckland where the overall vacancy increased, the Wellington office vacancy fell from 6.7 per cent to 6.0 per cent. Total vacant space has fallen to just over 83,000sq m in Wellington CBD, the second lowest figure recorded in more than a decade,” Dibble says.
“Prime grade vacancy has held at just 1.1 per cent, with the secondary sector vacancy at 7.5 per cent, which is down from 8.5 per cent six months prior.”
In Auckland, the overall vacancy rate at 10.9 per cent is up on six months prior but that has likely peaked.
“There is a divergence in trends for prime and secondary grade CBD office space at the moment that depicts the next set of trends for the sector.
“Vacancy within the secondary sector increased to 14.7 per cent in our latest Auckland CBD survey, up from 12.8 per cent six months prior.
“However, over the same period, prime grade vacancy declined from 7.5 per cent to 7.3 per cent, the first reduction in two years.
“Changes in work habits, a growing focus on collaboration and work culture and the challenges of recruiting and retaining key staff in a low unemployment environment is driving a flight to quality trend.
“Tenants are increasingly prioritising sustainability when considering leasing options with government and corporate occupiers mandating minimum environmental ratings, further accentuating the demand for a modern workspace.”
Development activity is accelerating as a result.
Colliers’ research shows there is currently 83,480sq m of new office space under construction in Wellington, which will lift the quality of the CBD’s inventory that is currently dominated by secondary quality premises. The proportion of prime grade space will rise from approximately 22 per cent currently, to just under 30 per cent.
In Auckland, development activity is also on the rise with approximately 120,000sq m of office space likely to reach completion over the next five years.
“The development sector’s confidence has been bolstered by the continued demand for prime quality space. While the proportion of higher-grade property within Auckland’s CBD has increased over recent years, currently sitting at 47 per cent, this remains low when compared with Australian markets.”
In Sydney, Melbourne, and Canberra, prime grade office space comprises between 62 per cent and 70 per cent of total inventory.
Despite the impact of Covid-19 on the Auckland CBD office market, average net face prime rentals held relatively steady over 2021. In Wellington, prime gross rents grew by around 3 per cent to 5 per cent over the past year, with outliers to the upside.
Ian Little, Associate Director of Research at Colliers, notes rental growth is likely to become more apparent in Auckland reflecting additions to prime grade stock, reducing existing prime space availability, and the inflationary environment.
“With prime space now becoming the key focus for tenants and staff, the market is increasingly reliant on the delivery of new space to grow and meet these needs, which will bring higher rents in a high inflation, high construction cost market,” Little says.
When reviewing investment conditions, the research notes the projected $12 billion in total commercial office, retail, and industrial sales values for 2021 will be a record for the New Zealand market, especially considering the low number of properties that sold.
“Despite increasing interest rates suggesting yields may ease over the course of 2022 from record-setting levels, evidence of this is limited to date.
“The amount of equity that investors have accrued in recent years and key stakeholders’ plans to continue buying and selling where appropriate will keep activity levels solid.
“Demand for premier assets is likely to be further bolstered as a relaxation of border restrictions releases pent up demand from overseas entities.”
- Article supplied by Colliers
