Seismic strengthening rules lead to uncertain times

Seismic strengthening is currently a topic of contention in the commercial property market, particularly in Wellington.

There’s a lot of uncertainty around which seismic strengthening guidelines should be followed, with the regulations saying one thing and significant sectors of the market saying another.

Martin Veale talks us through the seismic strengthening rules and the shift that’s underway in the market.

Why is there uncertainty in relation to seismic strengthening?

The current regulations – The Seismic Assessment of Existing Buildings (2017), often referred to as the ‘red book’ – outline the mandatory guidelines for seismic assessment and strengthening in New Zealand.

A proposed revision to one of the sections, C5 (Concrete Buildings), was released by the engineering sector in 2018 to reflect what we learned from the 2016 Kaikōura earthquake. Engineers can now refer to the revised C5 section (known as the ‘yellow chapter’) when making seismic assessments.

The yellow chapter is still being tested and hasn’t been legally ratified yet, so it can't be used to deem a building earthquake-prone (i.e. less than 34% of NBS) – the red book still needs to be used for this. But according to Engineering New Zealand, the yellow chapter is now seen as an accepted test of where a building sits.

Note: the NBS (New Building Standard) rating estimates the approximate risk to life within a building in the event of an earthquake.

Most engineers see the yellow chapter as superior to the red book, particularly for buildings with lightweight or flexible flooring systems. This type of flooring was problematic in the Kaikōura earthquake.

What does this mean for commercial building owners?

Despite not being legally ratified, the yellow chapter is becoming the market test for seismic assessment, particularly for larger corporate and government sectors of the market.

If a tenant is looking to lease a significant amount of office space at the moment, they usually want to know where the building sits in line with the yellow chapter. Major tenants are generally looking for buildings rated above 70-80% of NBS under the yellow chapter methodology.

Some major tenants in Wellington, like The Ministry of Education, The New Zealand School of Tourism and IRD, have recently made headlines by vacating office buildings due to seismic safety concerns. Although some of these buildings had undergone recent strengthening work, their seismic ratings were found to be much lower when tested under the yellow chapter guidelines.

This is leading to a lot of uncertainty and confusion in the commercial property market. Building owners are essentially in limbo, wondering whether they should strengthen their buildings to the yellow chapter standard or wait to see whether the yellow chapter is ratified (and if so, whether there are any further modifications to it).

What changes are expected over the coming months?

MBIE has recently released guidelines that provide some short-term clarity.

The MBIE guidelines make it clear that tenants don't need to rush out of a building just because it falls short of the yellow chapter. If there’s a plan in place to strengthen the building to an acceptable level within an agreed timeframe or the risk levels are manageable, tenants can remain in occupation.

Hopefully, we’ll see a decision made about the yellow chapter reasonably soon. But in the meantime, the MBIE guidelines should give some reassurance to commercial building owners and tenants. We expect that these guidelines will soften the ‘right, everyone out’ attitude that’s been in place over the last couple of years.

How does seismic strengthening affect property values?

Most real estate agents marketing significant amounts of office space now require a seismic rating in relation to the yellow chapter.

When a building receives a lower seismic rating, even just a little below the 70-80% of NBS threshold, it’s viewed less favourably by some sectors of the market. This view is mostly evident within the government and corporate sectors of the office market, but not exclusively so.

If an office building was deemed to be below 50-60% of NBS and there was no plan in place to improve the seismic strength, it would be very difficult to lease in the current market. We’ve seen increased resistance to office buildings with these characteristics, particularly from significant occupiers.

In either case, a low seismic rating has an impact on both the market and rental value of a building.

Valuing a building that requires seismic strengthening can be quite complex, as each building has its own challenges and the costs associated with strengthening can vary considerably.

It can be difficult to value a seismically-compromised building without knowing the exact cost and timeframe for the strengthening work. But generally, the building would be valued on completion of the strengthening work required, with deductions made for the costs of completing that work and allowance made for any associated risk, if appropriate.

Looking ahead

Over the next few years, things will likely become tougher for buildings with low seismic ratings, particularly in Wellington.

At the moment, there’s a shortage of office space in Wellington. However, there are several new office developments underway, so the shortage of space will likely be resolved in another two or three years when some of these developments are completed.

At that point, many of the buildings with lower seismic ratings will either need to be strengthened or repurposed. Historically, buildings like this have either been demolished to make way for new developments or repurposed for residential or hotel use.

Our advice for building owners

Although no decision on the yellow chapter has been made yet, it’s important to deal with what’s happening in the market. Ultimately, the market is dictating the rules around the acceptable level of seismic strength and the most appropriate chapter or guidelines.

No landlord wants to be sitting there with an empty building, so if the cost of seismic strengthening isn’t too onerous, we’d suggest that you consider moving forward with strengthening work in accordance with the yellow chapter.

In some buildings, the cost of strengthening work may be significant or you might have to vacate your tenants while you complete the work. In this instance, it might pay to delay strengthening work until a decision has been made, but it’s important to weigh this up with what’s happening in the market.

How we can help

If you’re looking to buy, sell, lease or develop a commercial or industrial building, we’re here to help.

Whether you need a market valuation, rental assessment or general property advice, our commercial valuers have the experience and local knowledge to provide you with advice you can trust.

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