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Wellington Office Market Report
Storm Clouds Ahead
The office leasing market continues to battle on in these uncertain times and is certainly in better shape than its retail cousin which is definitely struggling. There are a lot of shops due to close in the next 6-9 months which will threaten a lively CBD.
This week Sir Robert Jones was quoted as saying “We’re got to wait … for the enormous crash that’s coming next year, when the reality of the situation is no longer smothered.” He is also predicting mass unemployment worldwide.
Infometrics is forecasting a double-dip recession to hit during 2021, as delayed job losses punch a hole in consumer spending and drag economic activity lower. (infometrics)
“The next few months will be crunch time for the New Zealand economy,” says Infometrics Chief Forecaster Gareth Kiernan. “The loss of international visitors will be keenly felt by tourism operators during the normally busy summer month, while retailers will also be hoping that spending momentum continues into Christmas. Other businesses are also likely to reassess their staffing requirements heading into the new year if there is any softness in demand conditions.” (infometrics)
Infometrics is forecasting a decline in employment of 186,000 jobs by June 2021 compared with pre-pandemic levels. (infometrics)
If the unemployment rate does climb above 8% next year, Infometrics expects a contraction of more than 3% in both private consumption spending and GDP in the first nine months of 2021. Alongside job losses, declines in hours worked and weaker earnings growth will also constrain household spending. (infometrics)
I think the Wellington City Council and the local Chamber of Commerce and any other business body should be beating the drums on a daily basis encouraging the government to tell its workers to get back to the office. The government account for approximately 50% of the CBD workers and if more than half of them are still at home in the suburbs, the service retail outlets in particular (coffee, take away food, dry cleaning etc) will close as the rent and labour costs will be unsubstainable. A lot of them already have reduced their workforce and opening hours. Landlords are going to have to be pragmatic and drop their rents if need be to retain their retail tenants. Office rents may fall. due to lack of demand in late 2021 as more leases come up for renewal in 2021.
A lot of workers overall are still working from home for some or all the week which is having a distinct effect on the vibrancy of the CBD. Employers seem to have reconciled with employees over the “trust” issue of working from home especially in “measurable” jobs and will be looking to reduce space in a lot of cases when their current lease expires.
Companies will no doubt be re- assessing their business models and I’m picking a rigorous review will be happening in most work places as to whether they need that much office space now and who wants to work from home in the future. This should lead to a number of sub leases coming onto the market or if the timing is right, exiting leases will not be renewed and a smaller footprint will be leased. It is possible that a total of 5% – 10% of the work force will eventually elect to stay working from home.
This will obviously have an impact on the office market and the vacancy rate might balloon to 10%. We have had vacancy rates as high as this before (sometimes higher) and the market always adjusts to suit. In this case more office buildings might be converted to residential which seems to have an insatiable appetite for more space.
Rents should definitely level out (and possibly reduce late 2021) and landlords will try and hold steady as long as they can to protect the value of their buildings. Tenants expecting a few bargains right now are going to be disappointed.
Overall, the remaining months of the year are going to be challenging and in some ways its similar to being in January/February. It’s a fresh start and this time around, because of the uncertain times, we need to put in an extra effort along with innovative thinking, if we’re expecting 2020 to be a financial success. The key is to remain positive and hope there will be a few rainbows amongst the storm clouds approaching.
I expect most businesses will look to survive for the rest of the year and hope that 2021 will represent a back to normal Covit free period.
In the meantime, I wish everybody out there Good Luck and Stay Safe!
Rental Update – Current average gross rentals per annum (ex gst) are CBD core: $350 – $750 sqm. TE ARO: $240 – $370 sqm THORNDON: $240 – $350 sqm.
Report written by Tom Burke. Owner. October 16th 2020 (all rental figures in this report refer to gross rentals ex gst)