Time to think in commercial world
Investors will benefit from a frank chat with prospective or existing tenants in the coming months, writes Andrew Logie.
30 April 2023
Commercial property investors may have a lot to consider over the coming months. In particular, investors with leases expiring, leases coming up for renewal or due a rent review will benefit from having frank discussions with prospective or existing tenants on their current and projected financial status.
The current economic hardships don’t hit all industries in the same way. The following summarises our thoughts on the industrial, office and retail/hospitality sectors and provides some considerations for affected landlords. Seeking assistance from valuers and other professionals in your team will prove helpful for investors navigating this period. Industrial investment continues to be a solid performer, with low occupancy rates driven by lack of industrial land, reduced development activity and tenants who often operate in sectors with reliable incomes.
Landlords nearing expiry or signing up new leases need to test the market and in some cases can push back on onerous or preferential lease terms presented by tenants. Investors in this position will benefit from valuation advice to extract maximum value from lease terms where the commercial setting allows.
Office tenants previously seeking rental certainty and “staying put” during Covid periods may now have leases reaching expiry. What Covid also accelerated is the work-from-home phenomenon. A reaction from the office leasing market is to prefer a higher grade of space. This “prime” grade space acknowledges the trend of hybrid working (a mixture of WFH and office), incorporating intuitive AV/IT systems which allow occupants to easily transition between office work stations. To ease the transition from home to work, work spaces will increasingly need to be comfortable and generally attractive places to be.
Landlords seeking premium rents need to be mindful of this trend and engage with tenants around their future plans. Being accommodating around potential re-fits might entice good tenants to stay rather than consider other options. With development stymied for the moment and occupancy rates remaining low in most CBD
locations, landlords could be forgiven for taking an alternative view and continue with the status quo. The right call will very much depend on the particular attributes of a given premises and the length of time left to run on lease terms.
Small-scale retail continues to face commercial challenges created by a high inflation environment and online marketplaces, and should be appropriately vetted by landlords. Some hospitality and retail could get a welcome cash injection with tourism breaking back into the NZ economy, but this will be location specific.
Doing your homework on tenants, maintaining prudent asset management practices and taking reliable security for lease obligations will help landlords’ businesses in the long run. Investors who have been in the commercial sector through previous economic downturns will appreciate the value in allocating appropriate time and resources to these tasks.
As with all types of property development, commercial development has been hit with high construction costs and a lack of skilled labour. This can be seen by the reduced amount of consented commercial space coming through the authorities.
Developers who are experienced in “value add” projects could still see upsides to existing stock, the value of which has naturally fallen due to funding constraints
and increases in holding costs.
Development in the industrial sector is still viable if land can be sourced. Developers looking to sell “off plan”, and investors looking to purchase these assets, need to undertake a detailed review of deals to ensure they stack up. Proposed lease terms remaining bankable, warranty transfers, tenant incentives and the substance of
proposed tenants all warrant careful consideration before Agreements to Lease are concluded.
An election year can cause uncertainty generally, but this year there isn’t a long list of contentious policies that will affect the commercial property sector. We are expecting decisions to be made and deals to be done this year.
When times are good landlords can get away with negotiating deals under their own steam, but during economic uncertainty seeking advice from your team of professionals can prove useful.
Valuers can assist in crafting lease terms to maximise returns; agents can help investors pick from the best possible tenants on offer; and experienced lawyers can assist to protect assets over the course of a given lease and formalise deals struck.