Business Growth Drives down Wellington Vacancy
Wellington’s powerfully performing economy, driven by expenditure on major infrastructure projects, booming Information and Communication Technology and film sectors along with strong results from the manufacturing sector, has been reflected in a fall in vacancy rates across the region’s prime industrial precincts.
Vacancy has fallen to its lowest level since 2008 according to the results of Bayleys Research’s latest industrial vacancy survey. Covering Seaview, Petone, Ngauranga, Grenada and Miramar / Rongotai the vacancy rate has declined to just 4.5% continuing a trend which has been apparent since vacancy reached a post GFC peak of 7.5% in 2012.
The uptake in industrial space reflects the strong performance of the Wellington economy over the last two years. The latest Business Demography Statistics released by Statistics new Zealand show the total employee count in 2016 to have surpassed its pre GFC peak for the first time. As at February 2016 the Wellington Region had a total employee count of 246,180 up 10,350 on the cyclical low which was reached in 2011.
Employment has been driven by business expansion but also the formation of new businesses. The total business unit count in Wellington rose by a further 310 to 54,546 as at February 2016 according to the Stats NZ survey.
The Wellington region’s economy grew by 3.1% over the year to September 2016, according to the latest quarterly report on the regional economy produced by Infometrics. The report also highlighted the fact that unemployment had fallen to an annual average of 5.3%, having sat at 6% as recently as the 12 months ending March 2016.
Earthquake Drive Activity
While earthquake activity has caused significant disruption, within the Wellington property sector it has also driven activity within the leasing sector. Although a majority of damage reported has effected office premises the industrial sector has also suffered a degree of disruption, which has, in some instances forced companies to seek alternative space.
The Information Management Group, for example, has been forced to find alternative premises following damage to the racking system within its Porirua premises. It has therefore agreed to take occupation of the ex Linfox property in Gracefield Road. The company will occupy the space allowing repairs to be carried out at its Porirua property.
The closure of offices has, in some instances, also resulted in a need to secure storage space for furniture. An illustration of this has been the letting of warehouse premises in Glover Street Ngauranga to a government department which has been displaced from within the CBD.
There is no doubt that the seismic strength of industrial buildings has been brought into focus by the earthquake activity over recent months. For many larger tenants, particularly international groups, a rating of 80% of the New Building Standard (NBS) is a minimum requirement. Tenants are increasingly demanding sight of full engineering reports as opposed to Initial Evaluation Process (IEP) reports.
Vacancy at Eight Year Low
The latest Bayleys Research vacancy survey shows vacancy across the region’s premier industrial suburbs to have fallen to 4.5%, the lowest since 2008 when the rate sat at just over 3%. This is the fourth successive survey in which vacancy rates have declined having peaked in 2012 at 7.5%.
Vacancy fell in four of the five precincts surveyed, Seaview, Petone, Ngauranga and Miramar / Rongotai. In Grenada vacancy remained all but unchanged at sub 3%.
Vacancy within the Petone precinct fell to 5.3%, from 6.1%, despite the fact that the departure of Unilver from its long term Jackson Street headquarters released approximately 25,000m2 of industrial floorspace to the Market. The new owners of the property, the Prime Property Group have however achieved substantial success in leasing down the premises with companies including, Crown Relocations, Spicers Paper and Paper recycling absorbing all but 5,000m2 of the industrial component on site. This leasing success achieved, provides an excellent illustration of the demand for space within the precinct.
As reported in previous years the western portion of Petone is undergoing a significant land use change with bulk retail development supplanting the more traditional industrial users. The latest phase of this transition has seen clearance of property at 35 Hutt Road to make way for a new K Mart store. This has removed around a further 9,500m2 of floorspace from the area’s industrial inventory.
That vacancy which does exist within the precinct is predominantly located within fringe areas. The core industrial area, centred around Victoria, Fitzherbert, Sydney and Nelson Streets has a vacancy rate of just 4.7% down from 8.5% in 2015. This core area remains very much in demand particularly from small manufacturing companies and service providers which sees space quickly leased should it fall vacant.
Miramar / Rongotai
Vacancy within the precinct has fallen to 5.1%, more than halving the rate recorded at the previous survey when 10.7% of the inventory was available to lease. The reduction has been brought about by the combination of tenant uptake and the removal of space from the survey.
Rongotai is another precinct which has been, and continues to see land use changes. As with western Petone, there has been substantial large format retail development over recent years with the latest addition having been an extension to Wellington Airport’s retail Park. This has met with leasing success with all units now occupied.
Further diversification of user type is expected with Hotel and residential development strong possibilities. The precinct’s inventory has been reduced with earthquake prone buildings on Tirangi Road and Kingsford Smith Street being removed from the survey. This has resulted in a reduction of approximately 7,000m2 from the total inventory.
The film industry continues to be the biggest single influence within the Miramar and Rongotai area with further expansion having occurred over the last few months, with, for example, the industry taking previously vacant space within 133 Park Road.
In nearby Kilbirnie the ex Big Save premises have been leased by Weta Digital.
The largest of Wellington’s industrial precincts has experienced a fall in vacancy between the last two surveys, taking the rate down to 4.5%. The latest figure is the lowest recorded since 2008. Tenant uptake has seen occupied space within the precinct increasing by approximately 23,000m2 reflecting the growth in demand for premises within the area.
With market conditions tightening, rental rates for higher grade properties have come under upward pressure. Proactive landlords have also taken steps to secure existing tenants under new leases. At Port Domain, Port Road, for example, owners Seaview HP Limited have 100% occupancy, have secured one its largest tenants under a new eight year lease and had success in lifting rentals at recent rent reviews.
The area has not, as yet, seen significant levels of redevelopment being undertaken. With market conditions as tight as they are, occupancy, even within lower grade properties, is high and therefore landlords are not under the same pressure to embark upon development that they may be if they were receiving no rental returns. It is likely therefore that new development within established precincts such as Seaview will be on a design build basis as opposed to speculative development.
At 3.61% the vacancy rate within Ngauranga sits at levels bettered only once since 2004. The fall from the 4.9% recorded as at the previous survey has been driven, primarily, by uptake of space within Glover Street, Jarden Mile and Centennial Highway.
The specialist nature of many of the buildings in the precinct, many include high office components, has, in the past, meant that finding tenants for them when vacancies have occurred, has been difficult. Following the disruption caused by the GFC the Ngauranga precinct had the highest vacancy rate in the region in 2009 and 2010. The latest figure however sees the precinct boasting the second lowest rate across the surveyed areas bettered by only Grenada.
Vacancy is now concentrated within older style premises in, for example, Lower Tyers Road.
The Grenada precinct has recorded the lowest vacancy rate across all surveyed precincts for the third successive time despite there being a small rise from 2.3% to 2.8% on this occasion.
The tightly held nature of property within the precinct meant that there was very little tenant churn over the last year.
The appeal of the precinct is being bolstered by its proximity to the southern access point of Transmission Gully which is now under construction.
Tight Market Conditions Boost Other Precincts
With Vacancy rates tightening across the region’s established precincts, leasing and development activity is lifting in neighbouring areas, particularly within those which are set to benefit from the improvements in the regional roading infrastructure, such as in Porirua and Silverstream.
The trend is well illustrated within Richard Burrell’s Building Solution’s portfolio. The group had approximately 18,000m2 of vacant industrial space on its books in mid 2015 a figure which has been reduced to less than 5,000m2 at present. As options within its existing portfolio became more limited interest in design build opportunities at the company’s Silverstream landholding increased. Elgas Limited was the first company to commit to the six hectare subdivision. Recently Flyways has also decided on taking occupation of the site which offers easy access to State Highway 2.
Silverstream’s connectivity with the rest of the region will be bolstered, over the next three years, by improvements to State Highway 58 which are currently underway. The road is to be widened between State Highway 2 and Pauatahanui (north of Porirua). The Highway will also have on and off ramps connecting it with Transmission Gully
In Porirua agency reports advise that vacancy rates within existing buildings in locations such as Todd Park have fallen to multi year lows with practically no space available.
Development activity has also been on the rise. In Broken Hill the latest Bayleys Research Vacancy Survey has shown the inventory of vacant land to have fallen by approximately 25% from 8.5 hectares in 2015 to 6.1 hectares with there having been particularly strong uptake on Broken Hill Road.
Elsewhere in the precinct Alsco NZ purchased a 10,950m2 site in mid 2016. The site at Beattie Close in Porirua sold at a rate equating to $170/m2.
Enabling works are underway on the Transmission Gully project which will, upon completion, comprise a 27-km four-lane motorway from MacKays to Linden. There will be interchanges at MacKays Crossing, SH58, eastern Porirua (James Cook), and at Kenepuru. At present substantial earthworks are taking place and initial structures are being constructed. Earthworks have also begun on the State Highway 58 interchange. It is anticipated that this $850 million project will be opened to traffic in 2020.
Progress has also been made in respect of the Peka Peka to Otaki expressway the most northerly section of the corridor planned at this stage. The NZ Transport Agency has awarded the contract for the construction of the 13 km stage to Fletcher Construction, with work on the ground set to get under way in mid-2017.
It appears that there is a growing appetite within government to extend the corridor further north. Transport Minister Simon Bridges has been quoted as saying that there was scope to push the expressway further north albeit that the timing will rely upon costings. The NZ Transport Agency has confirmed that planning is to start soon on future transport connections between Palmerston North and Wellington.