Ventilation in Wellington's Bay Plaza Hotel is not up to "standard required to deal with the Delta variant" and has halved the hotel's capacity.
The hotel will cease operating as a MIQ facility completely at the end of the year, the Ministry of Business Innovation and Employment has confirmed.
Throughout the most recent delta outbreak, the Bay Plaza Hotel on Wellington's Oriental Bay was designated exclusively for close contacts of community cases that were unable to isolate at home.
However an MBIE spokesperson said it was never required to accommodate any close contacts.
Managed Isolation and Quarantine associate deputy secretary Andrew Milne said they had since learned of "operational constraints" associated with bringing returnees to Wellington.
"As well as operational constraints, a review of the ventilation system in the Bay Plaza has shown that significant investment is required to bring it up to the standard required to deal with the Delta variant," he said.
While health experts had assessed the risk posed by the ventilation systems as low, following the review only rooms with mechanical ventilation had been occupied by returnees.
"This has halved its operational capacity to just 32 rooms, meaning its decommissioning as a managed isolation facility will result in only be a minor decrease (less than one per cent) in our total national capacity."
"We have taken steps to mitigate risks through the rooms in use, and air filtration units are in place in common areas, such as lifts and corridors.
He stressed the facility did not rely on just one layer of protection, with all MIQ facilities "operating in a level 4 environment" with use of strict infection prevention measures developed by the Ministry of Health.
Milne said the "operational constraints" associated with bringing returnees to Wellington included that the capital's airport was not set up to easily cater for red zone flights.
"At the same time, it is important to retain a facility in the lower North Island and we have therefore decided to reduce the number of facilities in Wellington from two to one," he said.
"We are retaining the Grand Mercure as a Managed Isolation and Quarantine Facility because it has a larger number of rooms and is able to offer quarantine rooms as well as managed isolation."
After recently being designated solely for close contacts, the Bay Plaza had now re-opened as a managed isolation facility.
An MBIE spokesperson said returnee arrivals scheduled for September 10 and 13 had been delayed due to weather.
MBIE's contract with the Bay Plaza would end in January 2022, and it would stop receiving returnees in December.
Bay Plaza would re-open as a hotel in February 2022.
"MIQ will support management and staff over the coming months and will work closely with the Bay Plaza to ensure a smooth transition as they look to receive guests again from February next year," Milne said.
"Government agency workers at Bay Plaza will be redeployed to other duties by their employers when it is decommissioned.
"I want to thank management and staff at the Bay Plaza again for their incredible efforts on the front line of our fight against Covid-19."