Rising office rents add lease pressure
Quality CBD office space is so scarce in Wellington that rents are escalating and tenants are negotiating renewals up to three years ahead of expiry, according to real estate services firm CBRE.
Its latest research reveals Wellington’s CBD office vacancy rates – which includes the CBD, Thornden and Te Aro – had fallen to 6 per cent at the end of December 2018, from 7.2 per cent in June 2018.
But while 6 per cent equated to about 80,000 square metres of office space, the lion’s share was lowergrade class C and D, which had less earthquake resilience than tenants wanted.
The 2016 Kaiko¯ ura earthquake has shorted Wellington’s office property market by an estimated 100,000sqm, with buildings requiring extensive upgrades and earthquake strengthening.
The severe shortage of quality available space and the escalating rents were intensifying the pressure on tenants.
‘‘In most cases occupiers are responding by looking further ahead when considering options, in some cases up to three years from expiry,’’ CBRE’s report said.
CBRE senior analyst Richard Carr said the capital city had only about 600sqm of prime office space available for lease and an extremely tight vacancy rate of 0.2 per cent, which included half a floor at 20 Customhouse Quay.
The class C and D office space available was in smaller, older buildings with low space efficiency, low energy efficiency, little natural light and fewer amenities.
‘‘Rents will rise and rents are rising now,’’ Carr said.
‘‘Rental rates in the past two years for prime stock have increased somewhere in the market of 20 per cent to 30 per cent.
‘‘There are a few ways to negotiate. In the end the rents are higher. There is no way round it. There’s less space and less to hire.’’
Negotiating three years ahead of expiry was becoming best practice for corporations and large companies. Now, smaller companies and organisations, which used to address lease renewals nine months before expiry, were doing it two years ahead.
The pressure might be relieved by five buildings, currently being upgraded and earthquake strengthened, that were expected to be available at the end of 2019 and 2020. They had 66,000sqm of office space to lease.
‘‘There are a few ways to negotiate. In the end the rents are higher. There is no way round it.’’ Richard Carr, CBRE
However, by the time their redevelopments were completed the office space might have been committed.
Four of the five were already in advanced negotiations with prospective tenants and only one, a smaller building, was not.
CBRE could not disclose four of those buildings but could say that the New Zealand Post building on Waterloo Quay was the biggest of the five and was negotiating to lease its refurbished space. About 16,000sqm was available.
If all the leases NZ Post was negotiating were approved, there would be no vacancies in its building when the refurbishment was completed, which was expected to be by the end of 2019, Carr said.