Wellington Office Market Report
Less space = higher rents
A tight office tenancy market prevails at the moment with no let up in sight.
Recent research reports indicates a vacancy rate in the CBD to be around the 6% mark which is the lowest for a number of years. Judging by the amount of leasing activity in recent weeks, this figure is heading towards 5% rapidly.
The tight market has meant that landlords are now more bullish and rents are rising for good quality space. Rents for space that has been vacant for more than 12 months are tending to remain static reflecting the fact there are definite reasons why these tenancies are still vacant – poorly presented, overpriced, no views, slack landlord, low seismic rating etc etc. Most new stock of a reasonable quality and with a good seismic rating is leasing within 1 – 3 months of coming onto the market.
Most tenants are demanding a NBS (new building standard) minimum seismic rating of 70% NBS when seeking office options.
Despite 2 new fully leased brand new buildings (newly occupied in 2018/2019), being the new Deloittes Building (20 Customhouse Quay) and the PWC Centre (Site 10 – Waterfront), the market remains tight, particularly in the sub 300 square metre range.
Quality office suites in the CBD are now leasing at rentals in the $450 – $550+ per square metre per annum range and some are leasing off the plans (i.e) before they are built.
Landlords are now offering less incentives than before and a 3 year lease may include one month’s rent free (for set up purposes etc) but not necessarily 3 months rent free which was the starting point for most negotiations pre the 14th November 2016 earthquake. They are likely to offer only one month’s rent free for a 3 year deal. Incentives (rent free and/or contributions to fit out) are still available but landlords are not as generous as they were in the past.
Although Landlords are increasing their rents, this is mainly to cover increasing building costs (rates + insurance etc ) which have recently increased by 40 – 50% and showing no sign of slowing down. Of particular concern to the building owners is the rapid rate of increase in insurance which we will all be facing on a domestic front in Wellington over the next 12 months. So although it looks as though Landlord’s are having their day in the sun yet again, in fact their bottom line (nett profit) is not increasing all that much due to these increasing costs. Some office buildings are reported to have operating costs in excess of $200 per square metre. The cost of a landlord quality fit out for a floor recently was at the rate of $1,250 a square metre.
A further change in the market is some landlords granting an office fit out contribution rather than handling and paying for the entire fit out themselves. This de risks the landlord’s exposure in any leasing deal and could be a sign of the times in the the future. This means the tenant is obliged to seek out their own office interior company/consultant themselves and at times project manage their fit out – a task most tenants are not equipped to handle well.
Current average gross rentals per annum (ex gst) are $380 – $550 sqm for the Core CBD, $230 – $280 sqm for Te Aro & $240 – $300 sqm for Thorndon
Report written by Tom Burke. Owner. May 2019 (all rental figures in this report refer to gross rentals ex gst)