Tide Turns in Tenantsa[euro][TM] Favour : Rents under Pressure; There Have Been Marked Changes in the Dynamics of the Property Market Which Have Strengthened tenantsa[euro][TM] Bargaining Powers. NZ Management Surveyed the marketa[euro][TM]s Analysts to Find out What These Changes Mean for Businesses

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The delicate balance of power between landlords and tenants has shifted sharply in favour of tenants across all sectors of the commercial and industrial property market.

Zotlan Moricz, director of CBRE Research and Consultancy, says 2009 is shaping up as a[euro]the year of falling rentsa[euro] as the full impact of the recession bites into the business accommodation market.

Moricz says lacklustre tenant demand, increasing vacancies and adverse market sentiment is resulting in what the industry refers to as a fall in a[euro]effective rentalsa[euro] as tenants flex their muscles.

Landlords as far as possible try and maintain a buildinga[euro]s a[euro]face renta[euro] a[euro]" the dollar amount of rent charged per square metre of space a[euro]" because this helps retain their propertya[euro]s value in the longer term. Therefore rather than drop the rent directly, they do it indirectly by offering tenants a[euro]incentivesa[euro] or concessions. These take various forms, most commonly encompassing a a[euro]rental holidaya[euro], contributions to a tenanta[euro]s fit-out costs or premises upgrades or refurbishments. They are taken into account when calculating the effective rent that properties produce.

After a decade of steady increases, effective rentals for Auckland office space took a dip in the last quarter of last year and have continued that decline into 2009, according to CBRE. Its market rental assessments show a fall in prime CBD office rentals by 8.7 percent to an indicative net effective rent of $305 per square metre per annum in the year to March 2009, with secondary rents declining 14 percent to $183 a square metre.

Out in the industrial hinterland, ita[euro]s a similar story. There CBRE estimates prime Auckland industrial rentals dropped 5.8 percent in the March 2009 year to $110 per square metre, with secondary rentals showing a larger 14.2 percent decline to $79. Industrial and commercial land values have taken a big hit, with recent sales showing value declines up to 50 percent from the market peak in 2007, says Moricz.

Ironically, despite the contraction in demand for business accommodation, vacancy rates are still at historically low levels at less than 10 percent for most office space and under five percent for industrial space.

However both Moricz and Gerald Rundle, manager Bayleys Research, says this is masking an increasing amount of unoccupied space already being made available through a growing sub-lease market. This doesna[euro]t show up in the official vacancy figures because there is still a lease in place over the space on which rent is generally being paid even though it isna[euro]t being used.

a[euro]Businesses with a long lead-in time to their lease expiry are considering other alternatives, including subleasing, for space they no longer need,a[euro] says Rundle. a[euro]To date, much of the marketing of this space is being conducted a[euro]off marketa[euro] as organisations prefer to keep their level of retrenchment private for as long as possible.a[euro]

Colliers Internationala[euro]s head of research Alan McMahon says vacancy rates will blow out later this year and into next year, particularly in the office market as tenants relocate to new buildings currently nearing completion that they have pre-committed to a[euro]" leaving behind older buildings that will struggle to attract replacement tenants.

He is predicting a doubling of CBD office vacancy over the next two years, increasing from around 7.5 percent in Auckland at present to 14 to 15 percent, and a jump in Wellington from five to 11 percent.

a[euro]This will mean more bargaining power and choices for tenants and landlords will have to work harder to keep existing tenants and attract new ones,a[euro] says McMahon.

Rundle says market evidence suggests a growing number of tenants are approaching landlords requesting assistance to ride out the business downturn. …