Office space vacancies on the rise

Tough market: Vacancy rates have climbed steeply in low-grade office buildings.
Tough market: Vacancy rates have climbed steeply in low-grade office buildings.

Wellington’s central business district office-vacancy rate continues to creep up, with almost 18 hectares  of empty office space in the city.

CBRE’s latest market view report says that, in the six months to December, vacancies increased by 5702 square metres to 176,863sqm.

This represents an overall vacancy rate of 11.5 per cent, up from 11.1 per cent six months earlier.

The figures have been rising steadily in Wellington since the global financial crisis in 2008 but the biggest impact has been on lower-quality buildings.

CBRE reported there was no vacant premium grade stock  but, at the other extreme, the vacancy rate in D-grade buildings climbed to 19.2 per cent.

Vacancies in A-grade buildings rose 0.2 per cent to 4 per cent,  B-grade vacancies fell 0.9 per cent to 6.3 per cent and C-grade vacancies increased 1.4 per cent to 16 per cent.

The report says  vacancy rates are  expected to rise  over the next year, making  more office stock available.

‘‘Building refurbishment will continue throughout the city as a result of increasing tenant desire for buildings with high earthquake safety ratings.’’

Vacancies would continue to be concentrated in lower-quality secondary buildings in the core CBD and Te Aro precincts.

While the figures look grim, Colliers International leasing specialist Steve Maitland said a lot of corporate office movement in the capital showed  no sign of  slowing down.

‘‘Government also came through late in the year with some major decisions, having been largely absent from the market for around two years.

‘‘Several larger tenants are reducing their number of occupied buildings or, if they are only in one building, the number of floors they occupy, and leasing larger, more efficient floors where possible.

‘‘Despite the higher turnover of leases, the market is experiencing very little growth overall, with tenants generally downsizing space occupied and becoming more space conscious.

‘‘The ultimate driver is to become more efficient and to lower cost per staff member per square metre.

"This is possible in better-quality buildings where the building services can cope with higher densities, which is not possible in some older buildings. The net absorption rate is therefore negative.

‘‘The corporate market has, for some time, been conscious of this and it has reacted accordingly. We are now also seeing this being driven strongly across the public sector as well.

‘‘Some tenants have moved due to seismic issues, typically where their current buildings are below 67 per cent of new building standard.

‘‘Other tenants are reviewing options due to looming lease expiries and are endeavouring to improve their premises’ quality without necessarily paying a higher rental.

‘‘Significant incentives are being offered by a number of landlords, softening the cost of fitout and making relocation more feasible. The capital cost of a fitout has been a barrier to relocation. Market incentives by landlords have therefore been a major factor in creating churn.’’

Major recent leasing transactions include:
* ANZ Bank leased about  18,000sqm, with 14,000sqm in The Wellington Company’s  Tory St building and 4000sqm in Featherston St. The bank is consolidating.

* New Zealand Rugby Union has leased 2100sqm at 101 Molesworth St. It moved out of quake-prone premises on CentrePort land.

* A downsizing Standards Council leased 760sqm in Gilmer Tce.

* Baldwins leased 1500sqm in Vodafone on the Park.

* AMP Financial Services moved from various smaller floors to two large floors at Telecom Central.

Already in 2013 there has been confirmation of:
* The Ministry of Business, Innovation and Employment signed a lease of 20,000sqm of office space in the former Defence Building in Stout St. It will consolidate staff into one block when major refurbishment of the building is completed.

* The Ministry of Social Development leased 1100sqm of office space in upper Willis St to consolidate on  one floor.

* Opus leased 3300sqm in the former Civil Aviation Authority building in Petone. It will  move its laboratories from Gracefield.

Maitland said earthquake concerns had  created a ‘‘seismic shift’’ in the approach firms  were taking.

Tenants were coming to the market earlier to ensure they were fully informed before making decisions and due diligence processes were more rigorous and taking longer.

The Dominion Post