CBRE research shows tenant demand holding strong for Wellington commercial property

Latest figures from CBRE Research show the Wellington commercial property market in good shape overall, with some pockets of high demand and very low vacancy contributing to stable or rising rents.

CBRE Research Manager Jorge Chang Urrea said the figures highlight the current squeeze on the premium end of the CBD office and industrial markets. However, the secondary office market is facing further challenges following a flight to quality among occupiers.

“Vacancy in prime CBD offices and prime industrial facilities is basically non-existent and prospective tenants are being left with few options. In contrast, secondary office property is likely to struggle as vacancy increases.”

CBD Office Market

The prime sector of Wellington CBD market continues the strong performance it has enjoyed over the last three years. Significant contributors to this have been the completion of new prime grade buildings such as One Whitmore (17,100sqm) and 44 Bowen Street (11,549sqm). Renovations such as the Asteron Centre (33,550sqm) have also contributed to around 85,000sqm of new office space entering the market this year, marking a historic high. 

Despite the influx of prime grade office space, high levels of tenant precommitment have resulted in prime vacancy reducing to just 1,500sqm. Overall, CBD office vacancy increased to 7.9% during the first half of 2023, up from 7.5% at the end of 2022.

Matt Hince, CBRE Senior Director of Office Leasing, said a drive among office occupiers to attract staff back to the office following Covid has exacerbated the longer-term trend towards high-quality space.

“Tenants’ preference for prime grade buildings has resulted in vacancy reducing to extremely low levels and prime rents increasing. Conversely, we are starting to see the emergence of higher levels of incentives in secondary grade space as well as some grade A offices.”

The secondary grade office market is expected to continue to struggle as vacancy increases this year. Upcoming vacancies in grade B buildings are forecast to bring the vacancy rate into double digits (11.2%) in this sector – the highest since 2015. 

In terms of rent growth, prime CBD rents were up by 1.3% during the second quarter of 2023 compared with the first quarter of the year. Secondary rents were unchanged. The surge in grade B vacancy will hold back rental growth in secondary grade buildings in the coming years. 

Retail

The Wellington CBD retail market has been relatively resilient, with vacancy registering a modest increase to 5.7% from 5.2% at the end of 2022 and rents stable. The uptick in vacancy can be largely attributed to additional space within new office buildings entering the market. Rents were unchanged across all CBD retail sub-markets in the first half of 2023.

Industrial

Industrial vacancy is very low, with overall vacancy remaining unchanged at 2.4% during 2022. Grade A vacancy is at zero, illustrating the high demand for high-quality industrial space. However, prime grade rents were unchanged between the first and second quarters of 2023, while secondary rents increased by 1.4%.

The supply pipeline of new industrial buildings remains robust for 2023, dominated by small unit developments. The largest industrial facility underway is the 4,700sqm Foodstuffs distribution centre in Grenada North. A slowdown in new supply is expected in 2024 and 2025. As the supply pipeline moderates, lower rental growth is expected, however ongoing low vacancy and low levels of expected backfill vacancies due to tenant moves will keep rental downside in check. 

Investment Market

Investors continue to grapple with uncertainty around the interest rate outlook, while low transaction volumes are hampering the ability to predict where yields will peak.

Pricing on offer is influenced by the current availability and cost of debt as well as medium-term debt curve expectations. These borrowing cost considerations, plus asset scale, have had a significant bearing on liquidity and therefore pricing, said Matthew St Amand, CBRE Managing Director, Wellington.

“The behaviour of international capital also affects large-scale assets, as these groups can choose to invest in other target global markets where yield expansion has been significant.”

Prime assets in the office and industrial sectors have registered the biggest yield shifts in the past year. Yields increased during Q2 2023 by 20-25 basis points, a similar rate of change as in the first quarter. Retail assets also experienced yield softening, with prime CBD retail assets up by 20 basis points compared with the first quarter of the year.