Adapting to New Realities
Rising Auckland and Wellington office vacancies are undoubtedly good news for tenants, but savvy landlords of B grade properties are also positioning themselves to take advantage of the changing market.
A research report issued by Colliers International in April forecast double digit vacancies in Wellington and Auckland CBDs as the crop of new buildings under construction are filled. These rises indicated a period of static or falling rental and capital values, particularly for lower grade and poorly located properties, the report said.
In the past, the expansion of existing office occupiers and new market entrants would fill the enlarged stock, but with the economic downturn, demand is static. A CB Richard Ellis report released in May also indentified the trend of creeping vacancies and fall in net effective rents, particularly for secondary space.
However, there are numerous examples of building owners adapting to this new reality. By refurbishing their buildings to offer additional benefits for tenants, these landlords are repositioning their stock to meet the gap between prime and secondary real estate, and readying themselves to respond to tenant demand for good quality accommodation without the price tag of new build and other 'A' grade spaces.
One company ahead of the curve is SPI Capital, a property investment firm headed by managing director Murray Alcock. "We focus on good quality buildings in good locations, with great tenants and long leases," Murray says.
"We take a property through the phases of its life, including refits. Often it's buildings that could use some upgrade that provide the opportunity to create extra value."
The obvious areas for upgrade include things like bathroom facilities and elevator performance. Building entrances can also be a big point of sale, with strategies ranging from making the entrance more welcoming, smart and attractive, through to giving up lobby space for retail use to achieve higher returns. Ensuring accessibility issues are covered off can also help attract tenants who want to come into a building knowing the building is compliant and caters well for those things. But less obviously, building owners need to be cognisant of the current environment and find the touchpoint that will resonate with the tenant.
As Murray suggests: "It's only been in the last year that all these new pressures have come on. Until then, it was relatively easy to let space. Suddenly that changed, so you had to quickly rethink what you were offering. What we're trying to do is get maximum value out of a building, and to do that we're upgrading to create a premium identity at an economic rent."
Energy efficiency is also important for tenants, promising lower operating costs and overheads, and meeting sustainability goals. But Murray sees it as just part of the picture. "As much as we can, we go down a 'sensible green' route: the kinds of carpets we use, the air conditioning technology we use, and we think through these things, and do them if they are practical and sensible. It's got to be cost-effective for the tenant in the end."
But in tandem with these improvements, Murray maintains it's equally important to simplify the process of moving. "You have to prepare your space according to who you're trying to attract, do the space up - so it's smart, appealing and straightforward financially. For example, if you can hand tenants a finished product, it then becomes a leasing decision rather than a capital expenditure decision. That's critical right now."
He believes landlords need to think beyond economic cycles. "You have to make it attractive for people to move."
Truly visionary landlords will do well in the current market, adds The Building Intelligence Group managing director David Mann.
"There have always been those who are happy to invest in carpet and paint - the frills where it's easy to understand the bang you're getting for your buck because you can see it. And in recent boom times that may have been enough in many cases," David says.
"But to survive in the new landscape, vision is needed, which means looking at the 'invisible' areas of building services in particular, where there is a huge gulf between good and bad, and where any prudent tenant will get some due diligence done around the quality of those services."
However these can be big ticket capital costs, and with the more stringent criteria for borrowing money, landlords need to understand more than ever the value they will be getting for their spend, David warns.
In looking at feasibility, landlords also need to think about strategies such as refurbishing while tenants are in occupation.
"Depending on the nature of the project, the strategies can be significant around staging and sequencing work to maintain revenue streams. It all depends on the opportunities and nature of leasing in the building, but is something that can be considered at the front end, feasibility stage."
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