As we are all aware, both our personal and business lives are changing at a rate of knots. Some businesses are seeing opportunities, but the vast majority are being adversely affected. We will all need to adapt to the norm, to ensure we find our footing quickly. Accordingly, before the scourge is over every business, it is necessary for teams to work together to take a fresh look at their core business plan.
COVID-19 fuelled economic uncertainty, combined with emerging construction labour shortages, has largely put corporate expansion and relocation plans on hold. With dwindling demand, office and industrial landlords suddenly have another thing to worry about: their own tenants.
So what are the issues we are seeing with our tenants and how do we move forward?
CRCPG is seeing an increasing amount of requests from our tenant clients to sublease space as they downsize their office areas.
Many tenants are dropping their rental rates to get their sublease space filled quickly. This is creating a climate where office property owners could be forced into competition with their own tenants to lease out empty space.
Tenants will become competitors to landlords creating interesting opportunities. This environment will put landlords in a difficult position as they work to try to keep their offices full and income flowing. Landlords will see themselves competing with tenants who act as sub-landlords within their own buildings. Thus producing an additional hurdle for landlords in an already-challenging environment.
Having been contacted by many of our clients, we know that tenants are following the governments Code of Conduct and, have attempted liaising with their landlords for temporary breaks on rental rates or payments resulting from coronavirus-related economic impacts. We are also aware that under this code, the negotiation process is not as smooth as the Federal Government had initially anticipated.
In response, landlords may need to drop their current rates to remain competitive.
What happens next?
The next 60 days could see an even greater spike in subleasing. The commercial real estate market will invariably suffer the spill over effects from the slowing global economy and uncertainty within the capital markets.
Landlords and Agents who represent, manage and sell landlords’ buildings don’t want to see the market change, and will continue to try and convince tenants that the commercial property market is unaffected. Rather than debate this with those promoting the landlords’ agendas, we look to the historical indicator of market value – the rise of sublease inventory.
Having withstood three recessions over our more than three decades, initial commercial property slows are indicated by tenant advertising and leasing excess space to reduce their financial rent exposure. Tenants begin to evaluate existing inefficiencies, lean down headcount (or anticipate reduction) and reduce economic activities around R&D, inventories and supply chain activities.
Tenant and premises health is therefore a great indicator or the economic environment. Any tenant with an upcoming lease expiry will need to evaluate to either renew or relocate, with those companies planning for business expansions, carefully weigh their options.
Landlords are going to inevitably see vacancy rates increase and possible rate compression, with tenants looking to reduce occupancy costs by increasing efficiency and taking advantage of market uncertainty.
CR predicts, free rent will begin to become more prevalent in the markets over the coming year as landlords compete with subleases, and each other, in attempts to maintain their asking rental rates and high occupancy rates. As competition for tenants increases and rent abatement alone isn’t an adequate lever to secure the most attractive companies, landlords will capitulate and rental rates will begin a systematic reduction.
Our historic perspective, coupled with our tenant representation only advocacy platform, perfectly positions us to advise tenants to take advantage of these market corrections as they develop.
Understanding the nuances and complexities in your specific market location and operational requirements, and how to maximize your leverage and cost savings as a result of this seismic shift of circumstances, should be your highest priority.
CRCPG will assist in slowing or accelerating the process. Don’t believe all you are hearing.