The big lease question – how long is too long?

Office rents and vacancy rates may be common market knowledge, but there is less transparency around lease terms – which could leave tenants in the dark about how long is too long.

A recent analysis of lease terms in the Auckland office market aims to shine some light on this important consideration.

The research by Colliers International is featured in the latest ColliersLEASE, which includes market insights alongside a wide range of Auckland CBD and metropolitan office leasing opportunities.

Chris Dibble, Director of Partnerships, Research and Communications at Colliers, says businesses always want to keep costs down, especially through uncertain times.

“While rent, operating expenses and rent review structures are the obvious considerations, lease term is another factor of a lease agreement that should be considered.

“There is a growing ability for tenants and landlords to follow what leasing transaction rates have been struck, but lease term remains less straightforward to unearth, especially in aggregation for market trends.

“What then eventuates in this paradigm of limited data, is a reliance on estimations and anecdotal evidence rather than a more structured evidence-based approach enabling informed decision-making.”

So, what is a typical lease term in the Auckland office market?

“In a recent review of more than 250 leases in the Auckland CBD office and metropolitan office markets in

2018 and 2019, we discovered that just over one third of the leases had a lease term of between two and four years,” says Dibble.

“Many may consider that term shorter than expected.”

Digging deeper into the data, some interesting trends arise:

1. There was a higher number of lease transactions in the metropolitan (non-CBD) office market over the analysis timeframe. Vacancy rates in the CBD were at record lows, leaving little choice in some negotiations. There could be greater opportunities for occupiers in the next 12 months, with shorter lease terms favourably viewed as they fully assess working from home, hub and flex and hub and spoke options.

2. There is a higher volume of leasing activity from small to medium sized businesses. These businesses will typically occupy less space with shorter lease terms.

3. There is considerable variation by location, quality and landlord. The North Shore office sector has a high proportion of smaller office premises and therefore smaller businesses wanting shorter lease terms. However, the CBD also had a high proportion of leases with less than fouryear terms.

4. There has been a growing trend towards flexible workspaces which provides greater levels of flexibility on rent and lease term. Traditional landlords are matching to secure desirable tenants.

Matt Lamb, Director of Commercial Leasing at Colliers, says there are some key learnings from these insights.

“What the analysis highlights is that tenants need to know their local market to make sure what they sign up for is comparable to the wider market.

“While it will often be on a case-bycase basis, collecting information about similar property lease agreements should be a key workplace strategy.”