KEY POINTS:
With vacancies rising in city offices because of the economic downturn, landlords need to work hard at holding on to their tenants, says Chas Keogh, newly appointed director of office leasing for CB Richard Ellis, who will oversee the management of a 15- member office services team in
Auckland.
Keogh, who has been poached from CBRE's Sydney office, says 2009 is the year for landlords to move quickly on existing or pending future vacancies.
"Now, more than ever, it is imperative that landlords become proactive rather than reactive," Keogh says.
"Landlords need to be asking themselves how they can influence their tenants to stay in their existing space as well as asking how to attract new tenants into occupying their vacant space. Building owners need to take stock and re-evaluate how they can present their assets more favourably to the leasing market."
A newly released CBRE research paper shows that prime office vacancies increased from 1.1 per cent to 3.3 per cent in the past year, but this is still relatively low compared with the long-term average of 7.8 per cent.
"Premium grade office vacancies continue to be the lowest, at 0.7 per cent or just over 1000sq m of vacant space," the paper says.
"This grade currently has a small smattering of vacancies in the PricewaterhouseCoopers and ANZ buildings."
Grade A vacancy remains stable at 6 per cent in the heart of the CBD but has increased in the city fringe to 3.6 per cent.
Vacancies within secondary buildings rose to 11 per cent last month - up from 10.4 per cent in June 2008.
Keogh wants to strategically refocus the direction of CBRE's office services team. He believes the economic climate demands a more sophisticated leasing strategy which highlights the benefits and points of difference in building assets offered to the market, "rather than landlords throwing money at existing or prospective tenants in the form of incentives or reduced rent without much thought".
He says the increase in office vacancies can be largely attributed to global economic turmoil and this is having an impact on tenant confidence.
While rental levels remain a fundamental issue for all tenants, they are demanding more from their landlord.
"Tenants now want flexible workspace, flexible lease arrangements and additional building services," says Keogh.
"In a market of increasing options for tenants, landlords should be thinking about steps they can take to minimise vacancy rates and maximise their returns.
"Tenants are also more regularly considering other factors when it comes to their choice of space, such as Green Star ratings, access to public transport versus car parking, extra server capabilities and greater flexibility in terms of space and lease terms.
"So now is a really good time for landlords to think seriously about how they can best meet the changing requirements of the tenant."
Keogh says a falling net absorption of new and existing office space coming on to the market and rising vacancies reflect the adverse economic conditions underpinning the office occupier market.
"As an increasing number of businesses are beginning to feel the pinch financially, we're noticing an increasing number of tenants looking to sublease and assign space to cut costs.
"We have also noticed the trend towards tenants remaining in existing premises or choosing to relocate into smaller, less expensive premises."
His assessment of the office leasing market is echoed by CBRE investment analyst Brendan Keenan, who says cash flow has become more important than ever as landlords ride out the global recession.
"The ability to attract and retain tenants will play a key role in shielding investors from yield volatility and preserving value," says Keenan.
According to Keenan, debt to equity ratios (D/E) and, perhaps more importantly, interest cover ratios (ICR) will be a concern for landlords and their bankers this year as tenant defaults rise and companies contract and delay expansionary strategies.
"We have returned back to the basic fundamentals of property, where cash flow is key to the investment equation," Keenan says.
Keogh says professional and innovative marketing material, coupled with the ability to offer strategic advice outside the usual lease parameters, is paramount to success in the current market.
Under Keogh's direction, most of CBRE's office services team will adopt a successful international leasing model based on "landlord representation" or "owner representation".
"In recent times, there has been a 'muddying of waters' with regard to who the leasing agent is working for - the owners or the tenants," Keogh says. "The new strategy we will be adopting draws on accountability, communication, knowledge, marketing sophistication and ownership, all key to achieving a successful result for landlords and tenants alike."
Too often there is little or no feedback between the leasing agent and the landlord, resulting in the landlord not fully understanding the tenant's requirements. Often they can lose a tenant because of this.
"Tenants are becoming more knowledgeable in their understanding of the leasing process - what they need and what they want in terms of their accommodation," Keogh says.
"As a result of this, it is extremely important that leasing agents have a thorough understanding of the office space or building products they are leasing.
"Agents also need to be thoroughly familiar with the requirements of the landlord and the key drivers of the owners; and how they can effectively differentiate the landlord's asset so the two parties can be brought together to achieve the best possible result for landlord and tenant."
Keenan supports the view that "a strategic approach to leasing based on the international model of landlord representation will move the owner closer to their respective agent, enabling them to have better control and understanding of the leasing process".
Keogh began his career as a commercial leasing negotiator in 2002 with NSC Corporate, Perth, which was part of the Cushman Wakefield network, now know as JLL.
After being headhunted by CBRE in Sydney, and appointed manager of Office Services, he won CB Richard Ellis's Circle of Excellence award and achieved more than $1 million in leasing fees in 2007.
