KEY POINTS:
The balance of power in the prime office space market is shifting back in favour of landlords with vacancy levels now at an all-time low in central Auckland, says Chris Urry, the recently appointed commercial and corporate leasing manger of Bayleys Real Estate.
Urry says not only are
rentals for top-quality office space increasing but traditional incentives used to entice businesses into new buildings - such as rent holidays and, more commonly, assistance with internal fit-outs - are not as prevalent.
The latest CBD office vacancy survey undertaken by Bayleys Research this year shows the vacancy rate for prime space, which includes both premium and A-grade offices, has been steadily edging down for the past two years and reached a record low of 3.2 per cent in January.
Out on the city fringe where there are no premium buildings it's a similar story, with A-Grade accommodation almost fully occupied.
Urry says not only is there a shift away from inducements but the market is also starting to see significant reductions in rights of renewal, which traditionally run longer than the initial lease.
Rights of renewal effectively put control of a building in the hands of a lessee and make it difficult for a landlord to plan for and accommodate the growth of a business which may at some stage want more space in their building.
"I think we may see a trend towards first rights of refusal replacing rights of renewal in some cases," he says. "This would require a tenant to decide ahead of the lease expiry whether they wished to extend their lease in a situation where another business was keen to expand into their space."
Urry says the flight to quality, as it is often referred to, is changing the dynamics of the office market. It is mainly driven by the need to attract and retain staff who regard the environment in which they are being asked to work as a key consideration.
At the same time as the demand for better-quality office accommodation has been gathering momentum, the education sector, which has previously soaked up much vacant space, has been retracting.
"It's a challenging market for owners of secondary space at the moment. Unlike the top end of the market, they either have to continue to provide incentives or look at refurbishment to keep their floors tenanted," Urry says. "In some cases property owners are completely transforming older buildings into as-new space and are attracting good rentals and tenants as a result."
Urry says large companies are also having to look outside of the CBD to the southern corridor precinct in Greenlane and Penrose and the North Shore to find premises that offer large floor areas and good car parking.
Bayleys has concluded several substantial leases in the southern corridor to tenants such as Mighty River Power, Genesis and Spotless Services.
Urry, who was a top-performing agent for Bayleys in the 1980s and is a former New Zealand Olympic yachting representative, has returned to the agency after almost 20 years working with former Parnell-based boutique commercial and industrial agency Rands Robinson.
While not overlooking the requirements of smaller business, Urry says one of his primary focuses at Bayleys is heading up Bayleys corporate leasing team with the help of senior corporate leasing broker Andre Siegert. Other team members include Sue Collis, Bill Fenton, Geoff Graham and Paul Hain.
Hain is spending some of his time in Australia, handling the leasing requirements of Australian-based companies which also have operations in New Zealand, as well as dealing with several key Australian investment companies looking for opportunities in New Zealand. He spent 10 years in the Sydney commercial market before joining Bayleys in the mid-90s. Hain has negotiated many corporate leases, including the relocation of Simpson Grierson and Minter Ellison Rudd Watts into the Lumley Centre and the shift by Watercare Services into the former Mercury Energy building in Newmarket.
The corporate leasing team is supported by Bayleys Research, which, with five analysts, is New Zealand's largest property research unit and provides a broad range of services to Bayleys offices and clients. Bayleys Property Services also provides property and facilities management and valuation and consultancy services.
Urry says accommodation is generally the second-highest overhead of most businesses, after expenditure on staff, and profitability can be significantly impacted by increases or decreases in accommodation costs.
"A lease is like a parking meter, it is always running out of time and the decision to stay and reload the meter or move to other premises is one every tenant in the city inevitably has to make," he says.
"What is often surprising is that while a lease expires at a predetermined time and there is plenty of forward notice, few businesses take full advantage of the lead time to get the best possible financial and operational outcome for themselves."
Siegert says the service provided by Bayleys corporate leasing unit is designed to take the pressure away from the CEO or CFO of a business. It provides an audit of the state of the organisation's lease and premises efficiency in the context of its business direction and the accommodation opportunities and options available to it in the marketplace.
He is currently going through this exercise with Nestle NZ, which is looking for approximately 3000sq m of space.
With many businesses facing an increased rental cost, sometimes as much as $80-$100 a square metre to move to new premises, coupled with limited options in the CBD and a reduction in inducements, Siegert says staying in existing premises may be the best option for several organisations.
In this situation, a new lease arrangement will be negotiated with the landlord, sometimes well before the expiry of the current lease, and involve a substantial modernisation of space. Siegert says the business efficiencies and staff benefits resulting from an improved and a more modern layout will often outweigh any increase in rental costs.
"It may also be timely for some businesses to pose the question of whether they should lease or own space and our review of their accommodation circumstances can also shed light on this aspect," he says.