Lack of NBS ratings drives Wellington shortage

The push to ensure a high seismic new building standard (NBS) rating has seen demand outstrip supply for commercial real estate in Wellington, says JLL.

Releasing the agency's First Quarter 2019 Market Snapshot research report, detailing the state of the capital's office and retail markets, JLL's senior research analyst, Daniel Longmire, says prime central business district office space remains at near full capacity.

"Strong demand is coming from both government and private tenants," Longmire says.

"Lack of supply in the top end of the market has been driven by the increased demand for buildings with higher NBS ratings and stock removals post-quake.

"This has underpinned the noticeable gap in vacancy rates between prime and secondary space, at 0.6 per cent and 8.7 per cent respectively as at the second half of 2018."

Over the second quarter of 2018, total stock saw a rise of about 25,000sq m with 67,000sqm still under construction.

"Following fourth quarter of 2018, the Wellington office market has been unable to meet the demand for suitable space with the required NBS ratings," says Longmire.

"Despite the significant amount of new NBS-rated, high-grade stock currently in the development pipeline, the completion dates are keeping vacancy rates for high quality space low, with rental rates expected to continue trending upward."

Longmire says while JLL hasn't seen any significant changes in office rental rates since the fourth quarter of 2018, some growth is expected before the end of this year for all grades.

"Gross face rents for prime and secondary office assets have stayed at $550 per sq m and $333 per sq m respectively. Incentives have not changed, with prime CBD assets at 2.0 per cent and secondary CBD assets at 8.8 per cent and no further expectation to change for the next 12 months," says Longmire.

"The first quarter of this year did not see enough transactions to make an assessment on yields, however we have kept outlook at the fourth quarter of 2018 measures of 6.65 per cent for prime space and 9.25 per cent for secondary assets."

In relation retail, Wellington's market has continued to face structural changes as consumers alter the way they shop, with a number of trends impacting brick and mortar retailers across NZ.

"Similarly, to the office and industrial markets, we have seen a preference for higher grade stock," says Longmire.

"This has created a divergence between prime and secondary property assets with regards to demand, rental pricing, vacancy and investment preference. Additionally, we expect the increased demand for food and beverage will continue while traditional retailers are unable to adapt."

Longmire says JLL expects retail supply to increase around 5000sq m in late 2019 and into early 2020.

"This includes the development of 16-20 Willis St, Stewart Dawson's corner and the old Farmer's store in the Southern CBD, which will cater to a range of occupiers," says Longmire.

"Ongoing refurbishment and demolition of damaged and low NBS rated buildings will continue to ensure stock trickles into the market, typically returning at a higher grade than at the time of withdrawal."

Rents in both prime and secondary retail assets have stayed flat from June 2018, keeping their $2425 and $775 per sq m values respectively, but Longmire predicts that occupiers will look to move toward better deals in upcoming accommodation reviews.

"Primary yields have remained at first half of 2018 levels, with the average sitting at 7.13 per cent, while secondary yields have stayed at 9.75 per cent, unchanged since December 2011," says Longmire.

"Investors are becoming more cautious when it comes to retail assets, particularly those which will need costly improvements to increase NBS ratings or those outside of growth nodes and regional centres."