Changing Spaces: The Devil's in the Detail: Premium Office Space Occupancy Rate Remain High in Our Main Centres, despite the Economic Downturn. but the Changing Conditions Are Bringing New Challenges for Landlords and Tenants When It Comes to Negotiating Terms

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Leasing commercial property is a serious business that needs serious expertise, says a specialist in managing the interests of tenants and lessees. And the changing economic landscape is bringing new issues into focus.

Peter Scott, chief executive of commercial property advisers Parallel Directions, observes several emerging trends, including companies staying in their existing premises rather than relocating, and perhaps undertaking refurbishment, and tenants seeking specialist advisers to help them through rent reviews, lease renewals and relocation decisions.

"Others are reducing space requirements and need assistance in disposing of surplus space."

Scott says that in the present market commercial landlords and tenants taking a hard line over lease terms could be biting off more than they can chew.

"The real risk is a replay of the 1990s when tenants struggling with high overheads walked ... leading to high vacancy levels ... and landlords then having to offer huge incentives to attract new tenants. A solution is to view any landlord/tenant relationship as a partnership ... both parties are affected by current market conditions."

Scott says challenging economic times are great for sharpening thinking and that while the market might be depressed, the courageous will be thinking ahead and planning for growth when markets pick up.

"Tight money markets can alter the viability of property developments and renovations overnight. All developers from the scrupulous to the scurrilous- can be affected. This volatile market raises the need to consider sunset clauses in leases to protect tenants if developments don't go ahead." Scott says such clauses won't work in every situation and negotiation needs to be on a case-by-case basis. Rent hikes during rent reviews are not something the tenant has to live with, for example. "For the majority of commercial tenants anything that adds value to the business and reduces overheads is critical ... rent rises don't have to be taken at face value."

John Church is the national leasing manager for Jones Lang LaSalle. He says there is a lack of high quality office space in New Zealand's major centres and that the majority of new buildings under construction are already pre-leased. And with a logjam of leases due to come up for renewal in Auckland between 2010-2012, he says tenants should be thinking about renegotiations now.

"It's good to start thinking about and planning for these things at least two years out," Church says.

In Wellington, he says, the vacancies for space are also in the lower grade premises. The Government is a major tenant, obviously, and Church says it will be interesting to see if there's a change of government whether office requirements (space and style) change.

Property partners Ian McCombe and Howard Johnston at Brookfields Lawyers, note that the number and type of requests and requirements for properties is changing as the current tight economic conditions begin to bite.

"Things have changed a little bit--relatively recently, in fact, in the last few weeks. Questions are being asked more and more frequently: What do you do about tenants in default? How can I get out of my lease? Tenants are also being a lot more careful about their liabilities," they say.

Clients are asking about getting as much flexibility as possible in terms of being able to drop off space. If a company's overall trading position is deteriorating they will look at where its main costs lie and rent is often a major expense.

"We have also been talking to clients about assignment and sub-leasing--as options for reducing space and cost," the pair say.

Looking more specifically at the Auckland and Wellington markets, CBRE analyst Zoltan Moricz has several observations: In Auckland, he says, the occupier market remains positive with vacancies at long-term lows and rentals continuing to post increases in most sectors in the first half of 2008. …