Hard times force landlords to be flexible

Rob Lang of AMP Property Trust (ANZO). Photo / Greg Bowker

A bleak outlook on city-centre rents and vacancies has prompted Goldman Sachs JBWere to take a dimmer view of the commercial real estate market.

Analysts Buffy Gill and Marcus Curley said the latest report from consultants Jones Lang LaSalle (JLL) persuaded them to review their outlook for the listed real estate stocks - although they have retained a hold recommendation on most.

JLL's real estate intelligence service report for the six months to June predicted rising CBD vacancies in Auckland and Wellington and continuing pressure on rental rates.

Auckland's premium CBD office vacancies are picked to rise from 0.9 per cent vacancy to 2.6 per cent vacancy by next December and Wellington's from 1.3 per cent to 2.2 per cent.

Rents are falling in both centres and have declined by 9 per cent in Auckland in the last six months. The market has shifted towards the tenants and they have the opportunity to negotiate on their terms now, the Goldman report noted. Landlords are being forced to be more flexible and rent reductions were being given along with rent-free periods and leasing incentives.

"The JLL forecasts for rental growth and to a lesser degree vacancy form the backbone of our earnings estimates for our listed property sector coverage," Goldman said.

Auckland's rents will decline a further 6 per cent by next December and Wellington's by 2 per cent.

"Office vacancy levels as at June were lower than JLL had previously expected, due to supply being limited over the past six months as the decline in the economy impacted confidence and new construction. An increase in supply is, however, expected in the second half of this year.

"In Auckland, about 46,600sq m is forecast to come on line from developments at 21 Queen St, 80 Queen St, stage one of the Westpac building in Britomart, and the extension of 137 Quay St."

AMP Property Trust (ANZO) chief executive Rob Lang said the report was no surprise and listed property experienced a lag in absorbing the effects of a recession.

ANZO yesterday told the market it had renewed leases on eight blue-chip tenants, covering more than 23,000sq m of space across 25 floors in properties in Auckland and Wellington.

"We have started to notice in the market that astute corporate occupiers have begun again to make decisions. They're signing new leases and moving away from the 'delay and pray' mindset that has frozen them for the last 18 months. It's a good sign," Lang said.

ING Property Trust's Peter Mence said he did not consider projections from consultants CB Richard Ellis or JLL to be unrealistic.

"The good news is that it could have been a lot worse, when you consider the new stock added to the market has been very modest by comparison with 1987 for instance," Mence said.

Goodman Property Trust's John Dakin said he expected a weakening of demand for industrial property.

"The mitigating factor is that the supply in the industrial market has slowed dramatically and consequently I believe this will limit vacancy levels in this sector. Due to the fact that most industrial development is undertaken on a pre-committed basis and the build times are short, this part of the real estate market can adapt more rapidly to market shocks," Dakin said.

Graham Barton, a commercial valuer, said the housing sector cooled off early and now seemed to be recovering but the commercial property market was still softening.

"In a downturn, perhaps the pain is delayed by the longer leases and ratchet clauses that are typical with commercial property. The Department of Labour says unemployment was only 3.5 per cent in late 2007, now it's around 5 per cent and is predicted to go to 7 per cent by early 2010."