Office market response to earthquake risk in New Zealand

Abstract

PurposeWith the marked increase in the awareness of earthquake risks following the Canterbury earthquakes, the purpose of this paper is to assess if the reassessment of risk has influenced rents for office accommodation in commercial buildings. Two contrasting office markets are examined: New Zealand’s largest market within a high-risk earthquake zone – Wellington, and the country’s largest market within a low-risk zone – Auckland.Design/methodology/approachA sample of 252 leasing transactions were collected from a proprietary database of Colliers International, one of the largest commercial brokerage firms in New Zealand. Hedonic pricing models were developed to isolate the effects of building seismic strength on office rents.FindingsWellington office market rents tend to increase with higher earthquake strength (New Building Standard) ratings, all other factors held equal. In contrast, rents in Auckland, a low-risk earthquake area, do not exhibit such price effects.Practical implicationsThe study provides estimates of the economic value associated with seismic retrofits which are vital for building owners’ decision making who must weigh retrofit costs against the economic benefits of doing so.Originality/valueThis study provides the first empirical analysis of office rents in New Zealand and the first quantitative analysis, internationally, of the impact of earthquake risk on commercial rents.