Historic low vacancies in Wellington

Colliers International research shows Wellington office and industrial markets continue to tighten

Wellington office and industrial markets are continuing to tighten with vacancy rates across both sectors at historically low levels, research by Colliers International shows.

The latest vacancy survey data shows office space in the CBD remains in limited supply after the significant reduction in available space following the Kaikoura earthquake.

The overall vacancy rate is at 6.2 per cent while the 20-year average is 9.6 per cent. Prime vacancy is at 1.2 per cent.

Total supply will increase with the addition of 99,000sq m of premises either under construction or being refurbished over the next five years.

Investment Broker Michelle Chadwick of Colliers Wellington says record low vacancy across all the key commercial sectors is driving down yields and pushing up rents.

“The office market, in particular, is undergoing a significant transformation towards better quality, seismically resilient new buildings, or major investment in existing stock to strengthen and improve quality.

“This means rents have risen, notably at the premium grade, to levels required to actually drive the quality required.

“Traditionally, Wellington ‘prime’ rents have remained lower, or lagged behind the levels needed to justify new builds.”

The Government now occupies approximately half of the entire CBD office stock, providing a strong backbone and the strongest possible tenant covenant to investors.

Chadwick says shortage of available land to build new developments is also contributing to the falling vacancy rate.

“Unlike Auckland and Christchurch, Wellington doesn’t sprawl very efficiently into neighbouring suburbs where office locations still make sense. So investors see a captive and geographically constrained investment pool.

“Basically, from an investment point of view, Wellington has been too cheap for too long and is now playing catch up.”

In the industrial sector, Wellington’s vacancy rate has reached 1.5 per cent, representing just under 39,000sq m of space. This is the lowest result recorded since the annual Colliers survey began a decade ago.

The research reveals that new industrial supply has been constrained by a shortage of available and suitable land for development. New builds are predominantly owner occupied.

Major infrastructure development such as Transmission Gully is a significant catalyst to the upswing in demand across the wider Wellington region.

Associate Director Tim Julian says that quite a lot of industrial stock has also been removed from the market through conversion to retail.

“Petone is a prime example of this where, in more recent years, the NZ Post Te Puni Mail Centre has been transformed into a Bunnings Warehouse, together with an industrial complex to a Kmart, and the Colgate Palmolive factory site to Rebel/Briscoes stores.

“The movie business is also swallowing significant amounts of space in both the eastern suburbs and the Hutt Valley.”

Additionally, Julian says the industrial sector has been fuelled by strong growth in the construction and engineering sectors.

“Businesses involved with the supply chain for these industries are all growing strongly, not to mention the engineering workshops themselves.”

Low vacancy and strong tenant demand will continue to put upward pressure on rents. Yields will continue to firm through 2019 due to the lack of available stock for sale.

In the retail sector, Wellington experienced a 16 per cent lift in retail spending in the last two quarters of 2018. On an annual basis, spending was up 3.7 per cent.

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