Wellington Office Market Snapshot Q3 2019
The supply-demand imbalance continues supporting both refurbishment and new build activity, especially in the prime end of the spectrum.
Structurally low prime vacancy continued in the third quarter, with occupiers that are looking to move up the grade spectrum facing minimal options. In the secondary market, low NBS ratings have created a ceiling to demand as occupiers are generally unwilling to use low-rated space.
The current imbalance in supply and demand is not expected to fall back into equilibrium until a significant level of supply is able to enter the market. However, this is becoming increasingly challenging due to high construction costs and a tightening of bank lending.
The supply-demand imbalance continues supporting both refurbishment and new build activity, especially in the prime end of the spectrum. However, given the level of occupier appetite and a sluggish development pipeline, we do not expect supply to outpace demand any time soon. A number of projects currently in the pipeline should alleviate a portion of this pent-up demand over the coming quarters, with notable examples including 8 Willis Street and 10 Brandon Street.
With top-end space inaccessible, rents in B and C grade markets have risen for buildings with acceptable NBS ratings. The average gross prime rental rate rose to $575 psm over the quarter, with the secondary gross rental rate now at $345 psm.
Investors remain interested in high quality tenanted buildings with good NBS ratings. However, demand for secondary stock with vacancy risk or those in need of strengthening work has diminished significantly. Prime and secondary yields both firmed over the quarter to 6.6% and 8.9% respectively, though yields for buildings with ratings below 70% remained at 10.3%.