Article | Intelligent Investment

Wellington commercial property market moves through transition phase

The fundamentals of Wellington’s office property market are among the best in Asia-Pacific, despite the difficult global economic environment. Matthew St Amand outlines the current market conditions and looks ahead to 2023.

October 18, 2022

By Matthew St Amand

Wellington commercial property market moves through transition phase CBRE New Zealand

As the end of 2022 draws closer, the market is adjusting to the challenges presented by high inflation and ongoing interest rate rises. Total returns from the real estate sector will be tested by the inflationary environment, with the increasing cost of money putting pressure on some property owners. 

However, the majority of well-capitalised investors are in a good position to navigate through the current economic climate. Commercial property assets with stable tenancies and attractive lease terms will continue to serve investors well. Strategic purchases to align with longer term goals will also continue to be attractive to investors.

The fundamentals of Wellington’s office property market are among the best in Asia-Pacific, despite the difficult global economic environment. The city’s significant government occupier base, with its history of long-term, predictable occupation, has insulated the Wellington office property market from volatility in the past. It is likely to perform a similar function during this cycle. 

Structural changes in workplaces as a result of Covid-19 have caused uncertainty among investors in the office sector globally, with occupiers reducing their space requirements and more staff working remotely. However this trend has been less apparent in Wellington, with government occupiers expanding and seeking to increase their use of office space. 

Extremely low vacancy putting ongoing pressure on rents

Ongoing low vacancy in the office market is driving sustained rental growth, which is providing a further drawcard for investors. Market vacancy in Wellington has remained extremely low since 2016 and is now among the tightest in Australasia. Minimal increases in vacancy are expected to materialise over the next five years. High levels of unsatisfied occupier demand and limited availability of quality space lend strong support to expectations of rental escalation, which should continue to support investor returns. These factors create an investment opportunity that is very difficult to match anywhere in Asia-Pacific. 

New office development in Wellington continues to court the interest of occupiers who are able to meet the rent costs associated with market leading design and employee experiences. Wellington’s geographic landscape, along with the limited suburban office market, has kept rapid development under check, with significant precommitment being achieved before any new developments commence. This control has restricted overbuilding during robust economic expansion, insulating the local market from periods of weaker occupier growth. Occupiers continue to be drawn towards the higher quality assets in the market, particularly buildings with a high level of seismic performance. 

Transition phase as buyers and sellers adjust expectations

In the transactional arena, the market is moving through a transition phase as investors assess the current market risks, costs and expected returns. This is conventional market behaviour in parts of the cycle where a greater spread opens up between bid prices and asking prices. During these periods, minimal transactions occur as buyers and sellers grapple with an altered and unfamiliar playing field. We are currently seeing this phenomenon play out in the Wellington commercial property market, where transaction volumes are significantly down as buyers assess their risk levels and sellers hold on to assets through this phase of the cycle. This raises both challenges and opportunities for buyers and sellers. 

We are optimistic that the robust fundamentals in the Wellington commercial property market will reassure buyers and sellers as they adjust to the current market pressures. We expect this will result in transaction volumes picking up in 2023 as investors look to bolster their portfolios with the secure, stable and predictable returns which are available in the Wellington market.