Rents for new Wellington office builds tipped to reach record levels

The recently completed Deloitte at 20 Customhouse Quay. Photo / Supplied

Office rents in new Wellington CBD buildings are tipped to reach record levels, reflecting increased build costs.

Steve Maitland, a specialist in CBD leasing at Colliers International, says rentals could top $800/sq m gross for brand new, seismically resilient, efficient office buildings.

Average prime gross face rents increased to $534/sq m, up from $502/sq m last year. Prime yields firmed 20 basis points to 6.4 per cent compared to 6.6 per cent a year ago. Average gross face CBD core rents now range between $335/sq m to $660/sq m.

"New-build activity is commanding a premium above current paid rental rates. There is an economic rent required to 'kickstart' a development and a continual increase in build costs, as well as rising costs of insurance and rates.

"Tenants are prepared to pay for safety, a modern workplace and for achieving space efficiencies. They are no longer content with 15sq m per person and are expecting to achieve sub 11sq m per person, often with the ability to accommodate staff in as little as eight sqm per person. Tenants are embracing new ways of working and new furniture designs that allow them greater flexibility to deal with their staff and clients, reducing the total required area."

Larger floors that facilitate these changing work styles are in vogue, Maitland says.

The last two buildings constructed in Wellington (Deloitte at 20 Customhouse Quay and PWC at 10 Waterloo Quay) have floors of between 1,280sq m – 2,200sq m.

"Even the buildings being refurbished are endeavouring to expand floors where possible to achieve efficiencies, such as the major refurbishment of a Willis Street building for Statistics NZ and Ministry for Environment, enlarging floors from approximately 620sq m up to 1,300sq m."

The NZ Post building in Waterloo Quay has one of the largest floors in Wellington region. More than 11,000sq m has been leased in this building in 2019 with floors ranging from 1,200sqm – 3,000sqm, all to government tenants seeking more modern, functional office space.

Maitland says strong tenant demand and limited availability of prime office stock has resulted in a further reduction in vacancy rates in Wellington's CBD.

The 5.9 per cent overall vacancy rate is the lowest recorded since December 2008.

But Maitland says there should be some relief for tenants over the next few years.

"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 and the anticipated tenant moves associated with these new projects. There is 50,000sq m of space undergoing project work that is forecast to be reintroduced into the pool over the next 12 months."

However, Maitland says that not all space to be introduced is available. For instance, approximately 11,800sq m of space at 8-14 Willis is 100 per cent pre-leased to Crown entity Statistics New Zealand and the Ministry for the Environment. Refurbished Harbour City Centre at 29 Brandon Street will add more than 3,500sq m to the city's office stock but the building is already pre-leased to financial technology firm FNZ.

He says Colliers is currently working with landlords who can develop more than 69,000sq m of new office space in various CBD locations. Some of these are feature in the Colliers Lease magazine, showcasing 24 properties for lease throughout the Wellington region covering existing buildings, substantial refurbishments as well as new developments.

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.