A thriving IT sector, improving business sentiment and employment growth plus continuing tenancy consolidation from government agencies are providing increased impetus to the Wellington office leasing and development market. Ian Little, Bayleys Research’s National Research Manager, outlines some of the market’s key drivers.
Confidence has returned to Wellington’s office development sector with a raft of projects underway including new builds and major refurbishment projects. These developments are a reflection of Wellington’s improving economic backdrop and a tight supply of high quality office accommodation.
The drift by major corporates to Auckland appears to have come to an end as the Capital plays to its strengths, becoming a leading hub for information and communication technology (ICT) and film companies. Company expansion and formation amongst these groups are adding a new dimension to Wellington’s office leasing market traditionally dominated by the government sector.
ECONOMIC PICK UP
Economic growth has accelerated in Wellington City over the past year with its Gross
Domestic Product (GDP) increasing by an estimated 2.6% in the year to June 2015, according to BERL, up from 1.7% a year earlier.
The city’s unemployment rate of 5.1% sits below the national average of 5.7%. June quarter employment rose by 0.6% from the previous quarter and Internet job ads are higher than 12 months ago due to a pick-up in job advertising in the last two months.
The results of the ANZ’s latest survey of small business sentiment (June 2015) found confidence within the Capital’s small business sector to have held at higher levels than anywhere else in the country for the fourth consecutive quarter.
Figures released by Statistics New Zealand show that positive business sentiment is being reflected in business growth. As was the case in all major centres, the number of businesses and employment in the Wellington region fell sharply as a result of the Global Financial Crisis and New Zealand’s recession.
However, from 2012-2014 there was a recovery in Wellington Business Units to a new high of 53,213 while the region’s employee count reached its highest levels since 2008. It seems likely that the employee count will have surpassed pre-GFC levels when the 2015 figures are released.
While occupation by government departments still underpins Wellington’s office market, the growth of ICT and digital film companies has resulted in a widening of the tenant base. Wellington has the highest concentration of web-based and digital technology companies per capita in New Zealand. The growth in the high technology sector is far greater than in any other city in the country and Wellingtonians are more than three times as likely to work in ICT as people in other New Zealand cities.
Wellington’s publicly listed companies Xero and Trade Me are clearly high profile examples of firms operating successfully from Wellington head offices, but the city is also a favoured location, on a global scale, for ICT business start ups and relocations. Lifestyle, the compactness of the city, along with robust data and telecommunications connections has resulted in companies such as Loomio, SilverStripe and Kainic Medical Communications forging successful businesses in Wellington.
Wellington is also a world leader in screen and digital technology and is home to 60% of all film post production businesses in New Zealand, earning nine of every 10 export dollars generated by New Zealand in this sector.
Technological innovation in areas such as digital games and software development is taking Wellington’s reputation as a world player well beyond the silver screen and into broad areas of the information media and communications sector.
PRIME GRADE OFFICE SPACE IN DEMAND
Prime grade office vacancy within Wellington sits at multi-year lows which has resulted in a raft of new development and large-scale refurbishment projects getting the green light. A number of new office developments targeted at the private sector are underway or in the pipeline.
A new 10,000m2 office and retail building is to be developed on the CBD’s waterfront adjacent to the Waterloo Quay apartments by Willis Bond & Co. Designed by Athfield Architects, the building will comprise four office levels, each with a net lettable area of 2,200m2–2,400m2, above a ground floor of retail and public spaces and basement car parking. Willis Bond says the design responds to increasing demand from businesses for well located office buildings with large, flexible floor areas which enable them to maximise operational efficiencies. Approximately 75% of the office area is already leased ahead of project commencement.
Deloitte and IAG New Zealand will be taking approximately half of the space in a new $80 million 14-level office building on the former BP House site at 20 Customhouse Quay. A joint venture partnership between Wilton Capital and Auckland-based Newcrest Group is developing the new 5 Green Star 15,000m² building which will have 1,280m² floors and is expected to be finished in September 2017.
The Wellington Company is also about to start work on a 7,000m2 office development for Xero on the corner of Taranaki and Wakefield Streets in Te Aro. The $35 million project will be a redevelopment of the former 1920s’ built Manthel Motors building whose heritage-listed façade will be incorporated into a new 5-level steel-framed office building to be leased by Xero for 12 years. In a first for Wellington, the floors above the existing building will be sheathed by a semi-transparent outer skin fabric called Stamisol.
MANDARINS ON THE MOVE
A number of other major developments and refurbishments are underway for government agencies. These include:
- Kiwi Property’s $72 million part rebuildand refurbishment of the formerUnisys House at 56 The Terrace, withthe Ministry of Social Developmentto commence an 18-year lease over24,255m² in August 2016.
- The complete rebuild and expansionof the former William Clayton Building at the northern end of Molesworth Street in Thorndon, providing 15,500m² for the Ministry of Health on a 15-year lease scheduled to commence late next year.
- A 12-storey office block at 33 BowenStreet undergoing a major refurbishment inpreparation for the Ministry of Education’srelocation of its head office. It has a 15-yearlease over 13,179m² vacated by MBIE.
- A $20 million redevelopment andexpansion of the former DominionPost complex at 22 Boulcott Street forTranspower. The transformed premiseswill provide over 8,400m² of officeaccommodation with a scheduledoccupation date of September 2017.
- A $40 million complete refit and seismicupgrading of the 14-storey 25,000m² NZPost building on Waterloo Quay. NZ Postand Kiwibank remain in occupation with therefurbishment scheduled for completion inlate 2017.
With prime vacancy rates having trendeddown for the past three years, there has been upward pressure on rentals. There is no doubt that rents being paid on new developments such as Willis Bond’s Site 10 development will achieve record levels for Wellington. However, it is likely the completion of these projects will subsequently cap rental growth over the short term at least. Most leases will involve a relocation of existing Wellington businesses as opposed to there being new large scale entrants to the office market.
These relocations will leave space to backfill in late 2017 and early 2018 when a number of leases which commenced in 2007 and 2008 come to an end. The market will also have to deal with a further shrinking of governmental occupation once phase two of the Wellington Accommodation Project (WAP2) is concluded. WAP2 will reduce the Crown’s rental footprint by a further 14,500m², in addition to the 121,433m² in reductions already made since 2011.
NEW USES FOR OLDER BUILDINGS
These new office developments and continuing public sector consolidation will continue to put pressure on already raised vacancy levels within secondary grade office stock. Landlords of empty premises have been left with the option of either upgrading their buildings to compete for tenants or to look for alternative uses. Given the increased demand for inner city living and hotels as well as expansion of the education sector, conversion to other types of accommodation has proved to be an increasingly attractive option.
A recent example of the success of such projects was the sale of 175 The Terrace for $33 million in May of this year to Caniwi Capital. The property, previously occupied by ANZ, was extensively refurbished to create student accommodation by Cheops Holdings Limited. The building now comprises 390 single rooms leased to Victoria University on a 15-year term.
Other major players in this market are Globe Holdings and The Wellington Company, headed by Ian Cassels, which has converted 33,000m² of former office space to student accommodation with a further 10,000m² to come.
The Te Aro area has been particularly popular as a location for refurbishment projects. Much of the office space in the precinct was constructed in the 1980s when a raft of new development took place driven by a need to reduce pressure on the CBD. Now 30 years old, a significant amount of it is functionally redundant. Upgrading or refurbishment is therefore required, with proximity to Victoria University’s campus and the Courtenay Place entertainment precinct making it an obvious choice as a location for student accommodation.
More apartment hotels are also being built in the CBD, with a $15 million development currently underway in Boulcott Street. This will be leased to Village Accommodation which operates five other apartment hotels in the city.