Location, location, location: office rental rates up 4% in CBD, down in fringe areas

Press Release – Bayleys
Rental returns for commercial property in Wellington are reflecting a two-speed economy – with properties either showing healthy dividends, or struggling, according to latest real estate research data.

Figures from Bayleys Research show that a clear rift has emerged between primary and secondary office rates in Wellington.

Bayleys Research senior analyst Ian Little said Wellington’s CBD core had performed well above the Thorndon and city fringe precincts by comparison – particularly in the prime office sector containing new or newly–refurbished space.

“The average gross rental rate for central business district offices is $550 per square metre. This is an increase of approximately four percent over the last 12 months – and 15 percent higher than average gross rentals achieved in 2007,” Mr Little said.

“Wellington’s city fringe office sector has not fared as well. There has been a defined downward trend in rental rates. This underpins the ethos that location is one of the leading factors in leasing decisions, and tenants are unwilling to pay the same premium rate for office space outside of those key areas.

“The secondary office market has not fared as well either – particularly outside of the core CBD. In Thorndon, Te Aro, and fringe locations, the secondary rental rate has been trending downward.

“By contrast, secondary offices in the city core experienced a far greater downward correction, from an average of $360 per square metre in 2008 to $265 per square metre in 2011. However, the city core secondary market has recovered quickly since that low point and is now back to an average rental rate of $340 per square metre. “

The Bayleys Research data notes that in Thorndon the rental market has also remained reasonably flat since 2010. Gross rental rates in the prime office sector of Thorndon have remained stagnant since reaching $450 per square metre in 2010. The precinct is still dominated by Government tenancies, despite their reduced foot print over recent years.

Mr Little said that location likewise remained a key driver of leasing decisions – as shown by the recovery in rental rates in Wellington’s CBD core.

“Equal to location, in terms of what tenants are demanding for office space, is seismic strength and prime quality space,” Mr Little said.

Meanwhile, the Bayleys Research analysis notes that commercial property values in the Wellington office sector have generally been improving since a low point in 2009, following the market retraction as a result of the global financial crisis.

“The total return – which encompasses the return on rental income and the capital gain – for Wellington office investments for the year to March 2014 was 6.6 percent. This annual return has reduced over the last two quarters, but remains well above the total returns which were being achieved in 2009,” Ms Little said.

Bayleys Wellington commercial and industrial director Mark Hourigan said that while the capital’s commercial real estate market was yet to witness any strongly positive capital returns such as those recorded a decade ago, the market had taken heart following the recent sale of Grant Thornton House in Lambton Quay.

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