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Wellington commercial property market making positive adjustments post 2016 earthquake

JLL releases commercial property research for Wellington



Long term investment with development potential/new-zealand/en-gb/news/916/long-term-investment-with-development-potentialAUCKLANDLong term investment with development potential
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​​​​shutterstock_28853959 small.jpgWellington’s commercial property market shows its resilience following the 2016 earthquake.

While the country is buzzing following New Zealand’s victory in the America’s Cup and the successful Lions Rugby Tour (from a retailer’s perspective), the wider New Zealand commercial property market is also performing well, as we pass through the middle of 2017.

The Lions Tour historically, has brought in millions of tourist dollars and in 2017 it hasn’t failed to disappoint, with red jackets dominating rugby stadiums at every match. While the final numbers haven’t been tallied it was predicted that this tour would bring in $26.7 million to Auckland alone and generate 165,210 bed nights, which has resulted in accommodation providers being pushed to their limits. 

Although the overriding sentiment for New Zealand’s commercial property market is positive, some concerns are evident.  Interest rate increases and the availability of credit to the commercial property market, remain front of mind, while geopolitical uncertainty offshore poses obvious risks to us as a trade dependent nation.

JLL Associate Director of Research and Consulting, Tom Barclay says, “New Zealand has been a popular place to invest of late, particularly with offshore interests. Some investors have been removed from the market as access to funding has tightened, although this mainly impacted on local investors operating in the $1 million to $10 million bracket and for development plays rather than institutional quality stock. Even with foreign buyers active, the rate of yield compression has slowed throughout the country in response to a bottoming out of interest rates. It is possible that premium assets will see further yield compression with secondary and non-core stock likely approaching a cyclical low point.”

Office market

Vacancy levels in the Wellington office market increased slightly to 5.3% during the first quarter of 2017, up from 5.0% in JLL’s survey immediately following the November earthquake. It is predicted that vacancy will increase gradually over coming years as new build stock comes online and other refurbished stock re-enters the market. This is predominantly due to the repercussions of the earthquake in the Wellington region, which has seen a number of buildings closed for repair and/or refurbishment, in order to meet new building standards. Vacancy is less prominent in prime space with around 1% available at present. There is a distinct lack of stock immediately available over 500 sqm, which will limit the market in the short term. 

Chris McCashin, senior research consultant for JLL in Wellington comments, “The earthquake has impacted on square meter availability in the city, with Revera House and Defence House now earmarked for demolition. These two buildings alone will remove 23,000sqm from the current market, with a further 59,000sqm also currently out of the market for an unknown period of time. On a positive note, later this year two significant properties, 20 Customhouse Quay and the refurbished Transpower premises will return to the market, adding to the supply pool.”

Thorndon vacancy rates are currently almost non-existent being the preferred area for government tenants, this is placing pressure on that area of the Wellington market. However, it is a different story in Te Aro where vacancy rates have remained consistent at 16.4% and plenty of stock available.

The earthquake also impacted on rental rates, with the rental increase being a reactionary response to a situation where it is unknown how long some properties will be untenable. Following the earthquake, a number of tenants were displaced and sought urgent space, particularly properties that performed well during the earthquake. This resulted in rental increases in A & B grade properties. However, this is predicted to be temporary as over time more supply will enter or re-enter the market. Investors remain active in the Wellington market undeterred by the seismic activity, with a number of substantial properties currently on market and sales occurring. That being said, properties with low seismic ratings are a more difficult prospect in terms of gaining bank funding in a transaction, along with retaining occupants long term. 

Industrial market

New Zealand’s industrial market has remained strong so far this year, with the BNZ performance of manufacturing index indicating a score of 58.5 in May, its highest level in 16 months, signaling the manufacturing sector is in growth mode. 

Strong business confidence combined with the impact of the 2016 earthquake has seen vacancy in Wellington’s industrial market decline to 3.4% in early 2017, down from 4.1% immediately following earthquake at the end of 2016. 

“Some industrial property has been absorbed by displaced CBD tenants on what will most likely be a temporary basis. In addition, some industrial properties followed the trend of converting to bulk retail and this has added to pressure on stock levels. With primary stock maxed out, tenants have now turned to secondary stock,” says Barclay. 

In all the areas JLL monitors, there are no major developments planned in the industrial space, and although some smaller industrial properties are coming into the market, many of these are owner occupiers with purpose built properties.

Land values are increasing as any vacant land available is snapped up due to the lack of supply. 

Retail market

Since the end of 2016, vacancy in the Wellington CBD retail market has remained relatively consistent, with a slight increase in vacancy up to 5.8%. However, the prime areas of Wellington retail have low vacancy, particularly Lambton Quay at a low 3%.

A number of large, international tenants have entered the Wellington market of late, with more expected to follow. Recent examples include Adairs (Australian furniture retailer), Platypus (Australian footwear retailer). New Zealand’s new entrants include Rembrandt and Trelise Cooper.  The lack of available stock is causing a delay in further arrivals. Space requirements for big brands like Zara are likely to be more than two floors, which makes entering a tight market difficult. As a result, H&M will enter the market in Queensgate Mall later this year, which will likely see increased patronage.

A few developments are nearing completion namely Lombard Lane and Press Hall which, along with the new Transpower property, will assist in providing space for retail and food and beverage outlets. 

Read the Stuff article here​