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WELLINGTON CBD COMMERCIAL OFFICES 2009

Late 2007 and 2008 brought with it a dramatic change in economic and property market conditions. The impact of the world global downturn has left a weighty impression on transactional activity throughout New Zealand, but most noticeably in the major cities. Through 2008 the property market transformed, quite rapidly, from one that was buoyant, with plenty of interest in investment properties along with a lot of development, either pre-committed or speculative. Growing businesses and Government departments were absorbing space, creating plenty of activity in the leasing market and maintaining a tight supply on office space.

Over the last 12 months the realities of the economic recession have set in and its effects upon the property market will continue to filter through over the coming year. The number of investment transactions dropped off quite dramatically through 2008. According to QVNZ the number of commercial transactions was down almost 30% on the year to December 2008 compared to the preceding 12 months. However, the total value of commercial transactions was up on 2007, due to a number of high value sales taking place, particularly over the latter half of 2008.

 

 

The number of potential purchasers reduced considerably as credit became much harder to source. There was also an element of fear in the marketplace, which resulted in an overall ‘wait and see’ attitude from both vendors and purchasers. Investment yields softened through 2008 with commercial yields now sitting around 7.5% and 9%. The differential between prime and secondary commercial property, which became greatly compressed over recent years, has begun to widen again.

However, 2009 has seen a reverse of the activity, with many investors now believing the commercial and industrial markets are at or are approaching the bottom of the cycle.

There has been a shift in the type of buyers who are most active in the market. In recent years large property funds were investing heavily in prime commercial properties. It is these same funds that are selling some of their prime properties in order to reduce their debt to equity ratio.

A different type of buyer has returned to the market in 2009, representing the majority of the commercial office deals in Wellington CBD. This wide yield gap, and the belief that the opportunity to acquire these good property assets may not happen for a while, has seen that high net worth individuals, either singularly or as small private syndicates, are back investing in Wellington’s commercial market.

Before signing a deal though, the purchasers are putting the property under the microscope. More focus has been placed on how future-proof the building is. More emphasis is being placed on the remaining weighted average lease term and the financial longevity of the tenant.

2009 and 2010 will see the end of development and new leasings generated from Government for this property cycle. While pre committed projects continue to come on stream, such as IRD’s 1 Featherston Street and the completion of the Vogel Extension, further expansion of Government is not expected in the short or medium term. The government has led from the front in this respect, having been the most active tenant commissioning space in the Wellington office market. Expanding government departments over recent years have been limited in the new space they can occupy by the tight supply of office space, with vacancy around 7%. Forced to locate in numerous fragmented locations around the city, a preference for one tenancy versus many led to the consultation with developers to supply consolidated space.

Preference for the northern part of the city is still prevalent with the Beehive and transport hubs being the major draw cards. Almost all of the developments underway are in either Thorndon or CBD Core. The exception is the Wellington Company’s Willis Central development, the majority of which will be occupied by Telecom.