Commercial Property Rentals and Escalations to reflect current economic conditions

Posted On Friday, 02 November 2012 11:06 Published by eProp@News
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With the continued sluggishness in the commercial property market landlords and property owners are seemingly not accepting that the markets have changed and are asking rental rates – and escalations – received in the past, which are being strongly resisted in the current economic environment.

Org Geldenhuys, managing director of property development and management company, Abacus DIVISIONS, believes owners are also trying to cut costs by cutting the commissions of brokers and agents – a move that is causing inertia in the marketplace, and inadvertently driving up vacancies.

"Inertia, in any market, can result in a serious hiatus. And a hiatus often means that we are all spinning tyres in the sand and going nowhere – nothing is been done. There is limited progress and nothing gets galvanized.

"By cutting the tenant allowance or the brokers' commission, it can be likened to a case of pennywise and pound foolish. If a broker's commission is cut to the bone by one landlord, he or she will rather focus on doing work for those property owners who are not cutting commissions. This move definitely slows down activity in the market."

Commenting further, Geldenhuys said some landlords are trying to avoid this "negative approach" and are thinking creatively in order to "ride out the storm"

He said they are trying to fend off the year "with not too many vacancies on their books as they enter the festive season". It would seem that it is a tenant's market out there right now and landlords who do not "think out of the box" are not safeguarding their investments – and could find themselves with unwanted vacancies.

"The first obvious way to combat the sluggish market is to drop the rental rate for cash strapped tenants looking for relief on their cash flow. Landlords with older buildings - or paid off investments - are better placed to offer reduced rentals. These are usually done for shorter contract periods in order to negotiate better rates on a renewal basis going two years into the future. Some landlords," said Geldenhuys, "are taking the view that things will improve and then one would be able to get better rates".
He said landlords are also luring tenants by offering increased tenant installation (TI) allowances. This is where landlords would give more than the normal TI to fit out an office in order to attract tenants.
"This is a nice option for tenants who are comfortable with paying market-related rentals, but will get more from their landlords in terms of TI.

"This way the tenant's office will look upmarket and radiate a feeling of success and accomplishment – which is good for business."

Other new tactics being deployed by landlords and property brokers include the provision of rent-free periods in order to entice tenants. "In this scenario, once the tenant starts paying the rentals are market related. This serves to preserve the investment and, in the meanwhile, the hard-pressed tenant is given a breathing space during an office move period – which is usually costly."

Geldenhuys said his company had recently concluded deals of this nature, adding that, in these instances, landlords were prepared to subsidies the rentals for a few months in order to ease tenants into the agreement."
These 'easing- in periods' typically range from landlords giving a discount of 25% for the first six months, with the tenant paying full price thereafter.
"A variation of this theme sees landlords allowing tenants to occupy, say, 1000 square metres, but only paying for 750 square metres for the first year, 850 square metres for the second year and then full space fees by year three to five.

"This gives the tenant flexibility to secure premises for growth without having to move again in three years' time. In this instance, landlords have a long term tenant on their books, thereby increasing the cash flow stability and reducing tenant flux."
Geldenhuys said that since his company, Abacus Divisions, started marketing the Highveld Techno Park office park in Centurion, vacancies had been reduced by 30% by "coming up with a host of win-win options" for the landlord and tenants.

Cutting commissions and creating inertia

"But," said Geldenhuys, "I don't believe it is a good move for landlords to react to the tough times by simply reducing the commissions paid to brokers and agents – this simply creates inertia and prolongs any recovery."

Abacus Divisions is operational in the greater Centurion and Irene area - and is also one of the main marketers of the successful multi-billion Rand Route 21 Corporate Park in Irene.

 

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