‘Dying’ Wellington’s commercial property rebounds on several fronts

Dominion Post, June 26th 2015

Seaview

A pick-up in industrial leasing in Wellington is just one sign of the city’s recovering commercial property market.

After several lacklustre years, property experts say Wellington’s commercial property market is entering the start of a growth cycle.

Dogged by the global financial crisis, Wellington was also buffeted by earthquake fears, rising insurance premiums and a wave of corporates moving to Auckland.

One of several high profile Wellington property deals recently, 80 The Terrace sold for 36.1 million.

But in 2015, the drift to Auckland is arguably slowing, and business indicators are ticking upwards.

Low interest rates and a shortage of reasonably priced stock in Auckland have also prompted a flurry of office and industrial building sales.

“Wellington’s on the investment radar for a number of people who would have previously just discounted looking here,” said one.

Leasing is picking up as well. Spare prime office and modern industrial space in the Capital is now very hard to find, as businesses flock to better-quality, stronger buildings.

The conditions have triggered at least one big office project and is encouraging a general spruce-up of existing stock.

The city is looking good, says Jim Pinson, executive director of Colliers International in Wellington, who is critical of Prime Minister John Key’s comment that the city is dying.

I think for a longer period than I would have liked that one comment was the single most unhelpful thing anyone had said about the city.

“We were the last people to come out of the GFC in New Zealand, we didn’t have the rebuild that Christchurch had, we didn’t have the volume that Auckland has, it just put investors on notice. It made tenants think about their businesses in a different way.

“Markets are sensitive and influential commentary makes a difference.”

But this year is different, say agents. Demolition has begun on the quake-prone former BP House is seen as a vote of confidence, as it makes way for a new 14-level office building.

Willis Bond is also seeking resource consent for the five-level Kumutoto on the waterfront.  If they proceed, both buildings would add much needed space.

Elsewhere, tranche 2 of the Government’s departmental leasing plan will prompt several more large-scale refurbishments, the centrepiece of which is expected to be Precinct Property’s revamp of Bowen Campus, two multi-storied buildings behind the Beehive.

Pinson says the only drawback is as long-term tenants, the government departments have soaked up a lot of easily renovated stock.

“It’s nice for the city but no relief for the 2000 to 3000sqm corporates who might be looking for a move.”

The lack of prime space has been another reason for corporates moving north but Pinson says there are many that have gone to great efforts to stay, even booking buildings years in advance. “Corporates want to stay,” he says.

He hopes developers are watching.

“I think that we have been sitting on our hands for some years. The best buildings in town are all very good but we don’t have enough of them and many of them are now 20 years old. But they’re very popular and that’s why there’s no room to move.

“To have an attractive building that operates very well in a nice part of town is a great flagship and the more of those that Wellington can get, the more chance we have of keeping the big corporates that we’ve got and attracting new businesses, because it feels like a growth city.”

Research by CBRE shows there has been a “material lift in investor interest” in Wellington in the first quarter of this year, aided by its “relatively favourable pricing and stock availability”.

Yields for prime CBD offices have firmed to about 7.89 per cent, and industrial rents are up 5.32 per cent for prime and 10 per cent for secondary buildings in the last year.

Rents for prime retail space in the CBD – where new brands like David Jones are starting to emerge – have risen $49 a square metre to $2,186sqm in the last quarter, the first growth for three years.

CBRE said a variety of stimulants had only just started to affect the Capital’s economy, including improving regional consumer and business confidence.

Wellington’s quarterly growth was 1.6 per cent in December, compared with 1.2 per cent national, and employment growth was 2.1 per cent, well above the national average of 1.2 per cent.

But one of the largest stimulants was low interest rates, which looked set to fall further.

The gap between top-grade and secondary space was also beginning to close in retail space, although there was still a big surplus of unstrengthened, “secondary” office buildings.

CBRE’s senior director of office services, Matt Hince, says that on the leasing front, Wellington is waking up.

“I’d watch this space. I think this year’s going to see some office leasing activity. A lot of it’s reasonably advanced but yet to be announced.’

“Some of it is Government procurement, but a lot of the private sector that you wouldn’t  have picked six months ago. Some pretty chunky leasing deals in comparison to the last 12 months anyway.”

However, he warns that a surge of top quality office space would only have a small pool of clients. Those prepared to pay “the really higher rents is limited”.

“The Crown won’t look at it, they just can’t afford to be on the front page of astronomically expensive buildings.”

Mark Hourigan, head of Bayleys Capital Commercial, says the Wellington market’s recovery has been led by a steady decline in industrial property vacancies over the last two years.

Well located A-grade retail space is also in strong demand, and a number of leading retailers such as Briscoes, Bunnings and K Mart had recently committing to substantial new stores in Petone.