Wellington’s commercial property sector looking forward to bumper 2017

Wellington’s commercial property sector looking forward to bumper 2017

Total Property - Issue 7 2016

Wellington’s commercial property sector has got its mojo back, with the capital looking ahead to more than 55,000m2 of new and refurbished office space.

After all the uncertainty surrounding the consolidation of the Crown’s office space requirements in the city, the Government’s recently announced deal with Precinct Properties has removed a huge cloud over the Wellington office market.

Under the “Wellington Accommodation Project”, the Government has committed to long-term leases on 68,000m2 of space in five Precinct buildings.

In the private sector, demand for better quality office space has increased over the past 12 months and is likely to remain strong heading into 2017.

Investment activity is also on the rise - with both local and out-of-town investors chasing the higher yields Wellington offers.

Add to this growing visitor numbers, plans for a new convention centre and movie museum, the recent addition of David Jones on the retail scene, and a possible lengthening of the airport runway, and there is a real air of confidence surrounding the city.

Improving market fundamentals and an attractive yield spread have continued to drive investor demand.

Although Wellington office yields have firmed by around one percent over the past year, they still remain around one percent higher than in Auckland. This spread, along with improving business confidence and a tightening up of vacancies at the prime end of the market, is drawing increased investor attention.

Wellington’s CBD office returns have tracked in the mid- to high single digits compared with Auckland’s double digit numbers. However, it is expected Wellington will show further upside due to increasing investor and private sector occupier demand feeding into additional cap rate compression and rising rents amongst prime quality office stock.

Prime rents in the CBD have risen on average five percent to $600/m2 over the past year. New benchmark rents of up to $700m2 are also being set for some of the new builds currently underway.

Driving demand for these projects is a growing number of corporate tenants who want greener, more modern and efficient buildings than those offered by existing prime grade stock.

Some of the larger leasing deals over the past 12 months include PwC, FMG Rural Insurance and Cooperative Bank, all of which have taken space in Willis Bond’s new PwC Centre development at site 10 in the regenerated Kumutoto precinct, which is due for completion in 2018.

Prime rents in both Thorndon and the CBD fringe have remained relatively flat over the past 12 months. Secondary rents in the CBD core and fringe have also remained flat while those in Thorndon have fallen marginally. Te Aro rents continue to improve as the area increasingly becomes the mecca for knowledge-based businesses and creative groups.

As tenants migrate to the new and refurbished space over 2017/2018, a growing level of vacancy will emerge within back-fill space.

Secondary vacancies are likely to remain elevated. Recycling of some of the older vacant buildings into alternative uses such as student accommodation, residential and possibly hotels will help eliminate some of the vacancy but not all.

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