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Bayleys Research


WELLINGTON CBD OFFICE SPRING 2011

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DEMAND & SUPPLY MISALIGNMENT

 

The pressure of vacancy on Wellington’s commercial office market will reach its peak late 2011/early 2012 as the construction tail, a result of office development projects started prior to the global financial crisis but coming online post-recession, comes to an end and office vacancy reaches its highest level. The impact of the over supply of office accommodation is not felt in the upper grades of space. It is the space that is left behind by tenants upgrading where the issues lie. Of the projects that are included in the construction tail, all of them benefitted from high levels of tenant pre-commitment. A majority of these tenants have moved from B or C grade space, leaving large tracts of vacancy behind.

The quandary over what will become of this lower graded space is ever present in Wellington, with tenant growth non-existent. In previous cycles, there had been wide spread conversions of office space to apartments. Presently, this is not a strong growth sector and not proving to be the silver bullet for increasing vacancy issues. Furthermore, we are yet to see any significant organic growth from other business sectors which would absorb the additional space.

Further to this low level of absorption, Wellington CBD’s largest user of office accommodation – the Government – is rationalising its current use of space. A second term for National would see Government work to create further efficiencies through amalgamation of departments and reduction of staff.

A disparity between tenant demand for space and availability of space has resulted in further adjustment to rental levels throughout the grades, with the greatest adjustment observed in lower graded space. Current gross face rental levels for A grade space are $500-$550 psm. For B grade space, rentals have adjusted downward to approximately $300-$350 psm and C grade space is currently leasing at between $180-$250 psm.

In conjunction with downward pressure on rents is a growing presence of incentives included in leasing deals, as landlords work to secure a reducing pool of tenants. Although they vary from deal to deal, incentives are generally equivalent to one month per year of lease, term certain.

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