Commercial property expert Dean Croucher shares his insights on the buoyant Wellington CBD office market and the best ways for tenants to tackle their next property move using “strategic sourcing principles” rather than being an “option chaser”.
Recent research by CBRE indicating Wellington remains a strong commercial property investment market comes as no surprise from our work on the ground with clients.
The current CBD office market is showing signs of a “perfect storm” with increasing demand from occupiers and an ongoing shortage of supply, but as with any storm, there are ways to stay safe and dry. And generally the same principles you would heed in a natural event apply. Preparation being the key!
Demand on the Rise
There are a number of factors which support continued occupier demand for office space in the Wellington CBD; including:
- The ongoing flight to quality as businesses seek better quality workspace to support their staff/teams and employment brand (larger floors, in-building amenities (cafe, gym, bike parking, end of trip facilities etc), improved environmental conditions)
- An ongoing preference for a CBD presence for most businesses. Wellington is still a relatively small city and there are few businesses that are up for relocating their core teams to other parts of the Wellington region; when the CBD provides the best public transport connections, amenities and business networks
- New information emerging on the seismic resilience of many existing buildings (eg Wellington Public Library and others) which are requiring occupiers to either immediately vacate or to seriously consider alternative options
- A growing public sector (both full time staff and an increased use of contractors) that is seeing many government agencies needing to accommodate additional staff (the State Services Commission indicates the total public sector workforce grew by 5.2% in the year to 30 June 2018)
- A growing economy (Infometrics report the Wellington economy grew by 2.2% for the year to 30 June 2019 supported primarily by population growth, consumer spending growth and tourist spending growth)
- Organic business growth resulting from a growing economy
- The ongoing drive for space efficiency and multi-site consolidation. As newer buildings come to market (with more efficient floor designs) many businesses are taking the opportunity to consolidate staff into a single site while also reducing their space per person through the buildings inherent efficiency, adopting new ways of working and using new furniture systems.
Decreasing Vacancy Levels
At the same time the levels of vacancy/levels of supply in the Wellington CBD office market are relatively low. Colliers research indicates the overall office vacancy rate to 30 June is 5.9%, the lowest since 2008. Again there are several reasons:
- The spaces left by the tenants moving to new buildings has already been back filled. In many cases this back filling has resulted from occupiers needing to relocate from seismically prone buildings either decommissioned or in need of major remediation works, further reducing office stock/supply
- While there are several new building developments being touted many of these already have large tenants well advanced with negotiations to underwrite the commencement of these projects. There will be opportunities for smaller tenants in some of these schemes however they need to be quickly developing their own sourcing strategy or avoid getting left behind
- Equally, the economics of new developments are increasingly challenging even in a buoyant market, as tenant and investor expectations for building quality increase and construction costs only ever seem to head in one direction, and that is not “south”!
The Market Reaction
The “perfect storm” of increasing demand and shortage of supply naturally results in increasing rentals and more landlord friendly lease terms, particularly for tenants who have not planned well enough ahead and have not developed a robust commercial/procurement strategy around how they can maximize their commercial leverage.
Concurrently, as noted by the property research houses, in a low interest rate economic environment, there is strong demand for higher yielding quality property assets, underpinned by long term leases to quality tenants. These dynamics naturally lead to a strong investment market as developers/investors take advantage of these lease terms and sell down their investments to realize the capital gain made. Local and offshore investors are keen to secure well leased assets.
Tackling the Market “Head-On”
Too often we see tenants scrambling for solutions in the market without adequate lead time and without clear strategic intent. As a result, they become “option chasers” – carted around town by the agents trying to fit them into a solution rather than being in control of the process and outcome.
For a key strategic decision like a new workplace/office, businesses need to apply the same strategic sourcing principles they use for many of their other large investment decisions.
This starts with understanding your business/workplace needs, understanding your current lease and circumstances and developing a well-thought through sourcing strategy about how you will “go to market”. The way you communicate and engage with the landlords, developers and agents working for these parties will significantly influence the range of options, the commercial negotiation leverage you have and ultimately the commercial deal. In a tight market we are still seeing competitive lease terms being offered but these will only play out with adequate commercial tension.
As I pointed out recently in an article on the Auckland CBD office market, tenants always have options if they get prepared. Yes, we are seeing rentals increase, and yes, there are less options generally available but with lead time and a clear understanding of your businesses key requirements options either emerge or can be manufactured. The off market options may not be sitting nicely wrapped in an agency brochure or available via an on-line search engine. But as noted there is strong demand for quality tenants willing to make a medium - long term lease commitments and willing to pay a fair market rental. As a result, owners and developers are often able to create options that are not immediately obvious. With no lead time and no clear sourcing strategy this is more difficult.