Rise Of The Small Office
Until recently small businesses had little sway with landlords … then the pandemic changed everything, writes Sally Lindsay.
1 March 2022
Thousands of small businesses make up the backbone of the commercial office sector. They are not the Fonterra’s or Air New Zealand’s of the corporate world, but their leases serve as an integral base of a building’s occupancy.
Until recently, by virtue of their small size, small businesses have had little sway with landlords when it comes to negotiating.
Then the pandemic happened and their fortunes changed.
“Today, smaller landlords will negotiate lease rates at a shorter term,” says Lucy Mackenzie, Colliers International specialist in small CBD tenancies.
“The most significant expense for any office landlord is vacant space. The rising inventory of vacant and sublease space puts pressure on landlords and makes them more open to terms favouring tenants in some ways.”
There are other reasons a landlord is willing to sit down with a smaller tenant, says Mackenzie. “A high-value tenant, even a small one, shows other potential tenants that a building is worth considering.”
The tenant could also be in growth mode, which has appeal to the landlord. “You see this frequently where a tenant starts with 400m2 space, and in five years they take up an entire half to one floor in a building,” says Mackenzie.
Terms like expansion options in a lease can be critical to remaining in the same building as a company grows. “In other words, there are so many other important terms to negotiate that are just as important as the rental rate,” she says.
It is important landlords have the confidence tenants understand their existing and projected office space needs over the next five to 10 years before signing a lease.
It is true – when a landlord gives you a rent abatement, he/she is investing in your business. Hundreds of commercial landlords across New Zealand did this during the lockdowns to the tune of hundreds of millions of dollars. Many offered a 50% reduction in rent for months.
Heavily leveraged small landlords are going to feel the pinch of this gesture for some time, but felt it was the right thing to do to keep their tenants in business.
With the right attitude, tenants can strike all kinds of deals,” says Jake Jamieson, Colliers International specialist in suburban small office leasing. Small offices in the city fringe – Parnell, Newmarket, Ponsonby, Freemans Bay and Grey Lynn are typically 200-500m2. Many are owned by private landlords with only one commercial building.
The smaller offices have been in high demand since the first lockdown. Tenants moving out of the CBD to smaller premises have been active in the market, says Jamieson.
A Colliers International survey of Kiwi office occupiers and investors showed 77% of occupiers indicated they wanted to continue working from home one or two days a week.
Leading on from this, AMP Wealth Management is moving out of its Auckland and Wellington central city offices after a survey found staff did not want to return to the old ways of working.
Instead, the company will move into smaller collaboration and meeting-based premises outside central city areas for staff and clients who need to physically interact.
Plug In And Go
Demand is far outstripping supply for small suburban premium grade new builds or totally refurbished older premises.
Many landlords are offering a plug in and go model, with bike racks, showers, LED lights and other amenities that help businesses retain staff and encourage them back into the office.
Tenants are now well aware they can make do with less office space as staff work from home, but they may have realised they also need better, more resilient office space. “This crisis is going to accelerate the need for landlords to provide modern, flexible office space with lots of services,” says Jamieson.
Landlords also have to differentiate themselves with added services from a content perspective, whether that is sustainability or wellness solutions or digital technology, to help tenants be more productive.
To justify its existence, the small office has to become a destination with a purpose, says David Gooderham, global account director with WSP in London.
The “hotelisation” of office space will continue, with workplaces importing some home comforts. This might mean more relaxed dress codes, but also real planting and soft furnishings to make spaces cosier while helping to subtly create distance between people.
Jamieson says in the past landlords would leave their office space empty until a new tenant came knocking at the door and then negotiate a fitout. That space is now remaining empty.
The better landlords are proactively refurbishing their office space so tenants have the choice of moving out of the city to better grade premises.
Lease terms have also changed and smaller tenants can negotiate a short three-year term for peace of mind while more corporate-style tenants will negotiate a longer-term lease so they have a secure base.
The standard incentives are contributions to a tenant’s fitout or an entire fit out and a rent-free period of one month. Some landlords are offering two and three-month rent-free periods and the occasional one is offering a fiveyear lease with five months’ rent free.
Rents vary for each suburb but for new premises in Parnell they are about $450m2 + operating expenses + parking costs. Rents for older premises are about $350m2 + GST + operating expenses + parking costs. “There is more demand than supply in the $200-$500m2 rent bracket,” says Jamieson.
Colliers research director Chris Dibble says of the CBD’s 1.477 million m2 of office stock about 20% is small offices and in the fringe/metropolitan market of 1.738 million m2 about 25% is made up of small offices.
In the CBD office market, Mackenzie says landlords in high rises would, until recently, only rent floors as a whole to bigger tenants but they are now splitting floorplates into smaller tenancies, while charging the floorplate rent on a pro-rata basis.
“The biggest trend, and about the only incentive going, is landlords providing a fitout for tenants in smaller offices, so they can walk straight in and start work.
“They can see the fitout upfront and don’t have the hassle of costs blowing out.”
Rents for small CBD offices have been rising steadily over the past 18 months. Face rents are between $700-$1,000m2 gross for fitted out premises. Mackenzie says finding tenants for smaller offices has not been difficult, although CBD vacancy levels are rising.
“Some of the bigger landlords have trialled a floor or two in their buildings and are now rolling the concept out across their portfolios. These offices are appealing to tech, law, recruitment and professional services firms.”