What Level 2 looks like for commercial property

Commercial

L1/71 Peterborough Street, Christchurch City Centre 

   

The graduation to Alert Level 2 will be a huge relief for the commercial property industry – as businesses return to their offices and retailers open their doors again in shopping malls and on the high street. 

Since Alert Level 4, landlords and tenants have largely come to some kind of rent relief arrangement, and these agreements may continue as shoppers cautiously return to stores and office tenants bring staff back over time.

Where Leonie Freeman, CEO of the Property Council of New Zealand, has seen negotiations done well between landlord and tenant, it’s been through open dialogue.

“We’ve heard of several arrangements where the landlord and tenant have worked together to create a business continuity plan that sees both businesses survive this period,” she says.  

This is the optimal result – where people are acting with “humility and grace”, she adds, taking into account their ethical obligations alongside the contractual and commercial.

    

Commercial property agents act as matchmaker and more

As the economic fallout continues, conversations are going to continue between landlords, their leasing property agents and tenants about their revised needs. 

It will not be business as usual.

“People are talking about staff returning to offices, but not in the way they have been in the past. People working from home may be less inclined to go to offices – so conversations will be going on about how to deploy the workforce,” says Zoltan Moricz, head of research at commercial property firm, CBRE.

CBRE is seeing new office requirements “trickling in” with leasing enquiries being driven by shorter term interest. The volume of subleases coming onto the market is rising, says Mr Moricz. 

Ms Freeman says some landlords are seeing businesses with employees who are keen to work from home in some capacity, leading to the company wanting a reduction in office premises. Others, however, are hearing tenants expecting their requirements for space to increase as social distancing measures are calling for a bigger, and more segmented, office environment rather than an open plan one.

     

Good leasing agents more than matchmakers in current market

Good commercial property agents will not only be playing their usual roles in the new post Covid environment. More will be expected of them.

“Matchmaker has been the leasing agent’s traditional role – now it goes beyond that, it’s about providing extra value around their clients’ best course of action, for instance, subleasing,” says Mr Moricz.

“It may not necessarily be paid work but it will be part of staying relevant, staying in touch with the right people,” says Sam Nelson, partner with law firm, Lane Neave.

“Leasing agents are generally quite good at brokering negotiations, that’s what the good ones will do here, he says. 

Commercial property commentators believe that the market will be swinging in the occupier’s favour for the next year or more – for office tenants, retailers and manufacturers –  so landlords will have to be patient and adjust their expectations.

They will do well to understand their tenant businesses better, adds Mr Moricz. 

“They might also be more choosy about who to support and who not to, if they aren’t viable businesses,” he says.

    

Possible trends in shorter term retail and office in the future 

Mr Nelson sees serviced offices run by companies like Regus doing well in the next year.

“I think they will come into their own over this – it means companies aren’t having to make long term commitments.”

The Lane Neave partner says he can’t see landlords being open to offering leases which allow the tenant to reduce the rent or the premises at their convenience.

“But I would see a movement over the medium term to shorter term leases, with more rights of renewal which can be exercised by the tenant,” he says.  

And while retail tenants have got their stores open again, they won’t have their shoppers back in full numbers, cautions Mr Nelson.

Some landlords are providing support way beyond the lockdown, some going until the end of this year, he says. 

“Most landlords are pretty alive to the realities of what’s going on out there. They’d rather have a tenant in 2021 than empty premises.”

    

What the retail industry is saying

Greg Harford, the CEO of industry organisation Retail New Zealand, warns he isn’t expecting the retail sector to take off when shops open this week.   

In the immediate short term, people might splurge, but he thinks it’ll quieten down after that. 

Meanwhile those commercial leases are worth less to retailers than they were pre-COVID-19, he warns. 

Shop owners won’t tolerate rents going up on review every couple of years as has been common, he adds. 

The market will see much more of the pop-up style shop, with a reluctance by retailers to commit to long term leases, predicts Mr Nelson..  

“If there are retail businesses that cease trading, there will be vacancies so you could see more stores popping up,” agrees Mr Harford.

And while landlords may lose some brick and mortar retail tenants in the coming months, the Property Council’s members have seen an increase in enquiries for industrial space as retailers join the online movement, says Ms Freeman. 

“The next few months will be very interesting as we see these scenarios play out and witness what could be a shift in the market,” she says.