Wellington's office vacancy rate has dipped even further to its lowest level in more than a decade.
Colliers International's latest Wellington CBD Office Market Snapshot report, released today, shows the overall vacancy rate in the year to June was at 5.9 per cent.
That's the lowest overall vacancy rate in the capital since the December 2008 quarter.
Chris Dibble, Director of Research and Communications at Colliers, says steady tenant demand and limited availability of prime office stock resulted in the reduction.
"The supply pipeline is forecast to increase over the next few years through ongoing refurbishment and seismic strengthening, as well as the construction of new buildings.
"Some 50,000sq m of space currently undergoing project works is forecast to become available over the next 12 months.
"However, not all space to be introduced will be available for lease. One example is 8-14 Willis Street, where 11,800sq m of supply has been 100 per cent leased to Statistics New Zealand.
"Another example is the refurbished Harbour City Centre at 29 Brandon Street, which will add more than 3,500sq m to the city's office stock. The building is leased to financial technology firm FNZ."
Richard Findlay, Managing Director of Colliers International in Wellington, says there is strong demand for investment properties, and with limited stock available there is pressure for prices to continue to rise.
"Low interest rates are having a positive impact on demand, but the flipside is they are discouraging owners to sell.
"Rents are still rising but so is building insurance. In a gross lease market, owners aren't seeing the full benefit of rental uplifts.
"Seismic issues, the availability of mortgages and increasing insurance costs are the primary areas of concern for buyers."
Jim Pinson, Executive Director of Office Leasing at Colliers Wellington, says there has been quite aggressive rental growth across the board in the CBD.
"This is compounded by very high insurance costs, pushing gross rents even higher. Operating expenses on some A-grade buildings are now at more than $200 per square metre."
The Colliers report found Thorndon remains Wellington's most in-demand office precinct. There is currently no vacant prime space available, while the secondary vacancy rate has dipped to 1.5 per cent.
Space has tightened in the CBD fringe, also with no vacancy in the prime sector, and the secondary vacancy rate dipping to 4.8 per cent.
Even the secondary office location of Te Aro is feeling the squeeze, with vacancy dipping to 12.5 per cent.
Bucking the trend is the CBD core, where both prime and secondary vacancy rates have increased. However, they have only inched up to 0.7 per cent and 7.0 per cent respectively.
With space at such a premium across all precincts, average prime gross face rents have increased to $534/sq m, up from $502/sq m last year.
Dibble says that in the CBD core, average gross face rents range between $335 per sqm to $660 per sqm.
"These rates are only averages, and maximum rents being achieved for existing premises are higher. Further, buildings under construction or proposed to be built will set new benchmarks in the next couple of years.
"This is not uncommon in the Wellington market. When new buildings are delivered, the quality surpasses existing stock,
sometimes quite significantly given advances in construction technology and market requirements.
"This comes at a price, but history and vacancy rates show that occupiers understand the benefits."
From an investment perspective, yields have firmed 20 basis points to 6.4 per cent compared to 6.6 per cent a year ago.
Dibble says rising rents and firming yields are delivering positive total returns.
"MSCI's Property Index for Wellington CBD office properties showed a total return of 11.1 per cent in the year to March 2019, the highest annual return since 2008."