Wellington's Bay Plaza Hotel will no longer be used as a managed isolation facility from the end of the year - partly because its ventilation system does not meet the standard required to deal with the more virulent Delta strain.
Associate deputy secretary of Managed Isolation and Quarantine Andrew Milne said a review of the hotel's ventilation system had shown "significant investment" was needed to bring it up to scratch.
"This is not a reflection on its ability to function as a hotel, or on its ability to continue safely operating as a managed isolation facility for the next few months," he said.
While health experts had assessed the risk from ventilation systems as "low", only rooms with mechanical ventilation were being used "to reduce the risk of people coming into contact with infectious aerosols in the facility".
This had halved the number of beds available at the Bay Plaza to 32, so its decommissioning as a managed isolation facility would only reduce national capacity by less than one percent, he said.
"We have taken steps to mitigate risks through the rooms in use, and air filtration units are in place in common areas, such as lifts and corridors.
"We do not rely on just one layer of protection, and all Managed Isolation and Quarantine facilities operate in a level 4 environment, with workers following strict infection prevention controls developed by the Ministry of Health to manage the risks of spreading Covid 19."
Experience had shown there were other "operational constraints" for Wellington, including the fact the airport was not set up to easily cater for red zone flights, Milne said.
The Grand Mercure, which offers quarantine rooms as well as managed isolation, will be retained as the sole facility in the lower North Island.
The Bay Plaza will stop receiving returnees at the end of December and begin operating as a normal hotel again from February 2022.
"I want to thank management and staff at the Bay Plaza again for their incredible efforts on the front line of our fight against Covid-19. We also recognise and thank workers from across a number of Government agencies and private employers for the great contributions they have made to running this facility.
"MIQ will support management and staff over the coming months and will work closely with the Bay Plaza to ensure a smooth transition as they look to receive guests again from February next year. Government agency workers at Bay Plaza will be redeployed to other duties by their employers when it is decommissioned."
Milne said due to the extremely high demand for MIQ space, the Ministry for Business, Innovation and Employment was investigating other possibilities.
"We are in still in the early stages of investigating potential options, including in Rotorua and Christchurch, but no decisions have been made."
There were many complex issues that had to be considered, including workforce supply to support operations, suitability of the hotels, proximity to hospital facilities and appropriate transport hubs, and the potential impact on iwi, housing and economic activity.
"We are very mindful of the impact additional facilities could have on the health workforce, and this is why we are engaging with district health boards and the Ministry of Health and investigating options to relieve pressure on the health workforce, including investigating alternative healthcare arrangements."
A final decision about potentially establishing any new facilities will be made by Cabinet Ministers, he said.