Landlords get creative as recession bites
ANYONE driving through the CBDs of cities, the major commercial nodes or walking through shopping malls will become aware that vacancies are growing, says Tony Clarke, MD of Rawson Properties.
“As always in economic downturns, a surplus of space is putting rentals under pressure. Tenants are increasingly aware that regular eight or nine percent annual rental increases now make their premises more expensive than others newly available on the market. They are likely to move on once their leases expire. Landlords, on the other hand, are faced with the difficult situation that if they lower their rents to meet market conditions and attract new tenants to their vacant spaces, their existing tenants will soon also start demanding rental drops. The subsequent loss in revenue to landlords can be disastrous because over the past 24 months new leases have often been at 15-20 percent discounts. With tenants now clearly holding the whip handle, landlords have to be creative.
“Many are reducing the new tenants’ short-term costs but compensating for this down the line. For example, in the initial two years the lease might be at a discounted rate, and on the balance of the lease period the tenant pays a premium to catch up. We find that unless the tenant is a blue-chip company with a lengthy lease, landlords are often reducing initial fit-out costs as well.”
Clarke says landlords must do their best to hold on to their existing regularly paying tenants.
“Landlords should bear in mind that good service, good maintenance and good facilities (especially parking) will often induce tenants to accept higher-than-market rents.”
Care should be paid to controlling the extra costs distributed among tenants. Cost cuts achieved by the big service groups often make it cheaper to outsource management and maintenance.
Clarke says traffic congestion and petrol costs have led to many tenants seeking premises nearer their homes. Security and a liking for leafy surrounds have boosted the attraction of enclosed, guarded parks and the dramatic demographic shifts among office staff have made offices close to railway or bus stations very popular. In Gauteng the new Gautrain and rapid bus systems will prove attractive.
“For the foreseeable future, landlords will have to give their products something extra in rent reductions or other services if they wish to survive. Tenants should now secure long leases at good rates.”