Demand for quality space across sectors and strong rents points to continued investor interest
Despite a slight vacancy increase in office leasing, high quality space remains scarce in the Wellington commercial property market resulting in the continuation of rising rents, reports the latest vacancy survey by CBRE New Zealand.
The survey by the international real estate services company indicates the overall Wellington CBD office vacancy rate was 7.6% or 105,625 sqm as at June 2018, which represents a 7,649 sqm increase of vacant space during the first half of 2018.
The 55-point increase being the first vacancy increase since the 2016 Kaikoura earthquake.
Much of the overall increase is being attributed to a divergence in appetite for different classes of stock, with the Prime market vacancy at 0.1% compared to the Secondary market vacancy which sits much higher at 10.6%.
Senior Analyst for CBRE in Wellington, Richard Carr, says the two-tier market comes as occupiers are being more selective with accommodation needs in wake of the 2016 earthquake, as they are driven towards high quality and efficient buildings which have elevated seismic ratings.
“There’s no doubt quality is what’s wanted right now and Wellington’s two major occupier pools – public and private have different motives for this. For the public sector it’s very much about need, with the loss of two major buildings in the earthquake – the demolition of Defence House and Statistics House. This has resulted in a shortage of planned government space of around 25,000 sqm which will be alleviated somewhat next year with the completion of the Bowen Campus.
“While private occupiers continue to show strong tendencies to increase their accommodation quality while reducing floor area as they adopt more agile working practices in more efficient space.”
Carr says while there has been significant stock addition of 20 Customhouse Quay and the PWC Centre in the year to date, there are no significant completions expected this year in the rest of the Prime market. The ongoing shortage of vacant space continues to limit options for occupiers, and as a result, behaviours have started to change as occupiers look further ahead when considering accommodation solutions and are also more likely to renew in their current location.
The same two-tier growth trends between prime and secondary are also being felt in the industrial sector with gross effective rents for prime stock lifting to $135.8 during the first half of 2018, a 4.5% increase, while secondary stock increased by only 0.4% over the same period.
In the retail market it’s a different story, according to the report, with net effective rents for Prime CBD stock experiencing a 0.9% decline over the six months to June 2018 with an increase in vacancy along the Prime strip as some retailers close down or relocate.
While net effective rents in the Secondary market increased 3.8% during the same period as Willis Street, Cuba Street and Featherston Street experience a resurgence as some fashion retailers move away from the traditional Prime offering.
On the investment front, Wellington continues to enjoy strong market fundamentals as a result of the changes brought about by the earthquake, according to the report.
Capital values rose by 13.7% for Prime office stock during the 12 months to June 2018, whilst capital values for Secondary stock rose by 3.5% over the same period. Yields in CBRE’s Prime CBD basket firmed 5 basis points during the first half of 2018, moving from 7.31% to 7.26%.
Managing Director of CBRE Wellington, Matthew St Amand, says record low vacancy rates and elevated levels of liquidity in the market suggest there’ll be further firming in the Prime grade throughout the remainder of 2018 along with an increase in capital values.
“The lack of vacancy has resulted in increased rents meaning many buildings are tracking below market on income so vendors require strong initial yields. Coming after the largest transaction in the first half of the year - the sale of HSBC tower to Credit Suisse for $103m, the continuing low vacancies, rising rents and comparatively attractive market yields should see more international purchasers enter the market, while others expand their local portfolios.”
ABOUT CBRE GROUP, INC.
CBRE Group, Inc. (NYSE:CBRE), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (based on 2017 revenue). The company has more than 80,000 employees (excluding affiliates), and serves real estate investors and occupiers through approximately 450 offices (excluding affiliates) worldwide. CBRE offers a broad range of integrated services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com..
