Wellington CBD loses its shine after hitting bottom

By Suzanne Green

Friday 26th July 2002

International property advisory company DTZ New Zealand is less optimistic about the future of Wellington's central business district office market than industry expectations.

Its latest, just-published forecast is also lower than those of six and 12 months ago but it also notes the market is past the bottom of its cycle, mainly driven by demand from a growing government sector.

Overall rents firmed slightly in the past six months and would continue to grow slowly in the next five years, the chairman of the company's Australasian research unit, Ian Mitchell, said.

While demand for larger areas of office space within the same building placed upward pressure on rents, recent economic trends also had the downside risk associated with the office market.

"The growth in rents is expected to slow in the short term as the rate of growth within the economy slows," he said.

Premium-quality office rentals are predicted to increase 19% during the next five years. This year rentals for a new premium building are in the high $300 a square metre, with existing premium buildings reaching the high $200 to low $300 a square metre. Rentals in a good quality building - the bulk of Wellington's CBD stock - are in the low-to-mid $200 a square metre.

The vacancy rate increased slightly over the past six months as organisations restructured their space requirements and was 10.7% in December last year - up from 9.2% in June that year. Increased demand during that first six months was driven by strong employment growth in the government and business services sector, particularly in the information technology (IT) group, Mr Mitchell said.

However, demand from IT had dropped away dramatically in recent months. "One of the interesting things happening in terms of the dynamics is who is leasing space."

In the year ended June 2000 business services took up 43%, with nearly half that leased by IT companies. By June this year that had plummeted to 4.2%.

"So that means the IT sector has stopped expanding effectively and there is a shuffling around of existing business," Mr Mitchell said. "But the standout performance has been from the government sector."

In the 12 months ended June this year this sector took up just under half - 47% - of the space leased. This was due to the Labour government's policy of bringing back services that were contracted out and also to a peak in lease expiries.

Government departments were taking the opportunity to get out of average or lower-quality buildings and relocating all their business units into fewer but better quality buildings. Many of these lesser-quality buildings were bought by developers and converted to other uses - about 100,000sq m of office space had been taken out of the market in the past five years.

Mr Mitchell said anecdotal evidence suggested most of Wellington's premium quality space that was vacant in December either had been leased or was under negotiation. This would reduce the amount of vacant premium quality space to less than 4000sq m.

Whether this led to the development of another new office tower was another question. Lambton Tower, due for completion in September, was almost fully leased.

Mr Mitchell said short-term demand was expected to remain strong, with rising interest rates placing upward pressure on yields toward the end of this year, particularly if monetary conditions were tightened to subdue inflationary pressures.

Comments from our readers

No comments yet