There are signs all over town, I can find space by myself easily?

It’s true that when you start looking at office space then new signs suddenly become very visible (same effect as looking at new cars). Anyway yes you could look for a real estate sign in a location you want and might luck in and find the building owner. The building owner will gladly show what space they have whether it’s the size you want or not. Commercial landlords expect to deal with real estate agents and are always happy to pay a fee to them to secure new rental income. Experience repeatedly proves that landlords needs and requirements are usually 180 degrees away from those of a tenant. Landlords expect the agents to groom their tenants, to take them to their building only if the size and style of space is suitable, to advise them of different deals in order to learn what is reasonable in the market and these things are best achieved by an independent person.

When I contact an agent, what should I tell them?

In short as much about your requirements as possible and please tell them your real budget. The truth is tenants want to pay as little as possible, I get that but if you tell them your budget is only X which the agent determines to be well less than market then that agent is less likely to extend themselves and find the perfect space… if you hear the words “if I find the right thing at that price I will ring you back….” which is code for no you won’t!

Why would I want to pay an agent?

Typically a tenant receives a great deal of advice and effort and expects to pay nothing for it. It’s an unusual quirk of the business but there it is. You will motivate an agent to work hard for you if you make it clear that you will work exclusively with him for a time. The last thing they want to hear is that they are the fifth person you have called today, by simple averages they are not going to achieve a sale and they are better off looking to service someone else. So another approach might be to say to your agent ok I will pay you. Now agents are bound by a code of ethics and legislation to make it clear where they are being compensated so if a tenant pays the agent then there is amount you could easily recover as rent free or incentive from the landlord because they expect to pay anyway. Real estate agents only have their time and expertise to sell. If you agree to pay them then they are effectively guaranteed a fee, a return on their time. Therefore they can afford to take their time, look under every rock and present all the options and allow you the tenant to choose from a level playing field. Professional pride will kick in, I can just about guarantee you will get a better deal than you would otherwise have got!

One last word…

That’s easy! Choose someone who knows the area, has experience and knows their way round a contract. And good luck!

Usually if someone is wanting out of their lease agreement its because they want to downsize or simply can’t afford their monthly payments. Most lease agreements provide for subleasing or assignments but these are not always easy to achieve in a timely manner. It’s true that as a species landlords aren’t known for their philanthropy, and may want a payout to terminate, they are foregoing income and will incur costs, fees and effort to secure a new tenant. If you have behaved well you might get lucky! Landlords should make it their business to get to know all their tenants who are their customers and it may be that other tenants wish to expand and it will be in his interest to secure better tenants on longer term deals.

Regardless if you are having difficulty meeting your rental obligations it is far better not to act unilaterally and engage the landlord in a solution if possible. I have heard of some agreeing to rent reduction or terms to help tenant over rough patches.

The difficulties experienced by our friends in Christchurch over recent months adds another layer to this question also with earthquake damaged buildings, both repairable and beyond repair, those in the red zone but not accessible and those compromised by a neighbour. Clauses 26 and 27 are seldom read carefully in my experience however we now have good reason to understand them properly. In the case of total destruction clause 26 allows for the landlord to determine when to terminate the lease and 27 provides for partial destruction where the premises can be repaired and the tenant may cease rental payments until reinstatement is complete and the landlord is obliged with all reasonable speed to reinstate but with no obligation of releasing the tenant if that tenant is severely inconvenienced by the disruption to their business.

The lesson then is to keep a copy of your lease agreements elsewhere (hopefully not also within a red zone) so that should a serious earthquake occur you get to find out what your obligations, rights and options actually are and second possibly to consider disaster planning, not just backing up digital data but creating a plan of how to operate for weeks or months while being locked away from your premises. Lastly consider business interruption insurance, landlords often buy cover for loss of rents and so tenants can get insurance for costs arising from a major interruption causing them to locked out of their offices.

If anyone from Christchurch can add first hand experience to this topic I should be glad to hear from you!

So subleasing in this way is that it can potentially subsidise your rent by $10,000 per year and provide you with flexibility in the future by expanding into the extra office at a later date.

Using what is commonly known as a ‘make good’ clause a tenant must render the premises and fixtures and fittings back to the landlord in clean order repairing all damages except for ‘fair wear and tear’ which is largely subject to negotiation between the parties. There is a better than even chance that a landlord will see value in existing partitions and so my advice is to repair holes and damage to walls and at least latch paint them, thoroughly vacuum carpets and clean if necessary before the landlord inspects and will most of the time prevent any unpleasantness or large invoices.

As per clause 31 of the current ADLS lease the tenant may be asked to remove any partition walls particularly if they had erected them. That decision is largely up to the landlord thus my suggestion to address paint and repair issues.

If you have an old lease or have taken over by assignment someone else’s lease then the fine print may render some real dangers particularly if you must replace carpet. Costs will be considerable, say $50 per m2 or a minimum of $10k on a 200m2 space. To replace the carpet you will need to demolish all partition walls which will mean repairs to ceilings, plaster and paint perimeter walls (say $10-15 per m2) and even re-balance air conditioning venting.

Landlords are often happy to punt a few hours of their solicitor’s time in the hope of recovering a cash sum to pay for make good or new refurbishment. Remember read the fine print and manage your risk!

It’s true that some landlords have poor reputations, some of them are even deserved! A landlords job basically is to provide quiet enjoyment to his tenants, that means the buildings services must operate, comply and be serviced regularly. The building should remain waterproof and free from rubbish, contaminants or other nuisances and even step in to protect the tenants from each other when their relationships get strained.

A landlord/tenant relationship is a marriage of sorts with a defined term but potentially open ended with each party offering the potential of renewing further into the future. As such it is my view that a certain amount of ‘courting’ is advised. Landlords often investigate potential tenants with credit checks, ask for references or security in the form of guarantees. Tenants should investigate not just what but who they are letting themselves in for. Traditionally real estate agents are taught not to let the two parties meet, I have had the experience of such a meeting not go well and lost a deal as a result. The objectives of landlord and tenant are completely opposite, one party wants the rent to be as high as possible and locked in for a very long time and the other wants to cut any cost they can and retain flexibility with short term lease commitments. Real estate agents have duties of care that in my view involves allowing tenants to form their own view rather than rely on your advice which will no doubt return to bite you later….

A landlord’s delivery of quiet enjoyment will vary widely and depend on their objectives and ambitions for their property and of course their personality and management style. In some cases having a professional property management firm to look after the building and tenants is preferable to an individual landlord doing these things himself. In other cases landlords offer personal attention and react quickly to any request large or small.

The best advice I might offer to my tenants to say look around the building, do the lifts work, is it clean and tidy, check the toilets and common areas. And meet with other tenants, ask them whether they are happy with the building (whinging about the lift is par for the course), are they happy with the landlord, does he respond quickly or ever? Are his charges for electricity reasonable and verifiable?

Commercial leases are for fixed terms, tenants can’t easily leave their office floors or shops if they don’t get on with their landlord, they have signed a contract promising to pay a rental until the expiry date and landlords can easily seek legal remedy against you if you decide to stop paying even if you no longer occupy their space. I can recall the story of one overly proud landlord who was very pleased with his first office tower purchase and regularly called in to visit his tenants. One day he burst in on a doctor conducting a personal examination on a patient and the doctor promptly packed up and left. I understand the landlord decided not to pursue the doctor for the rent for the remainder of his term.

Gross leases became popular during the property market crash of the early 1990’s as a way of enticing new tenants particularly for office towers with ground leases (and therefore ground rent) and so it also became difficult to compare one net rental with another because operating expense rates could vary widely. Gross leases have remained the standard in Wellington particularly ever since with one or two larger landlords pushing back to net since that time.

The intention of a gross lease is to allow the tenant to control or know with some certainty  their occupancy costs over a defined term of their lease, usually 3 years and therefore the landlord must wear operating expense risk but it was never intended that that gross means utility charges used by the tenant. Therefore when you look at the Outgoings schedule, item 1 for Rates will usually be crossed out and item 2 for water, gas, electricity….utilities or services will usually be left. Where a tenancy is not separately metered for electricity as is often the case with smaller and part floor suites a tenant can expect to pay a ‘fair’ proportional share of the electricity account. But is ‘fair’ based on the proportion of their space relative to the floor or the whole building? Canny tenants will insist on some wording in their leases identifying that outgoings and utilities being ‘relating to the premises’ will means common area charges and costs cannot get recharged.

Landlords can’t usually control  escalating utilities charges: water rates and electricity are set largely by the providers and can be subject to massive (relative to CPI) increases. A professional property manager will however be able to justify their accounting and proportional share calculations to their tenants. Larger tenants will on occasion request to view the accounts and check that costs have been shared and calculated in accordance with their Deed of Lease. This surely is one way of gauging a transparent and  professional landlord!

Leverage means the exertion of force by means of a lever. So what I mean is what power do you as a potential tenant have in this office space market? Its a soft buyers market, any landlord should bend over backwards, offer a multitude of incentives for the honour and privilege of letting you into their building right?

The signs on office towers are plentiful, the real estate internet sites are bulging with new and old listings and the vacancy rates are inching upwards. The economy is still just bumping along, the world scene looks worse and there are still more pessimists than optimists out there so the outlook for building owners and their bankers is one of hard times now and for the foreseeable future. So why wouldn’t any landlord salivate at the prospect of your business?

Cutting to the chase your welcome will be in direct proportion to the benefit the addition of your lease income brings to the landlord and each have different criteria and motivations. So how do you determine that? Well quite simply the number of good options for office available to you is all the information you need. If after a reasonable search you have 0 or 20 options which are suitable for your ‘needs’ then you know how competitive a landlord needs to be and how much they might want your rental income. And for all your needs I mean the complete package; the quality of building, the standard of fittings on the floor, the total area is right, the rental budget, the lease terms and the right location with proximity to either or both your clients or transport hubs or parks for staff.

The reality is that for smaller tenants (and I mean 100m2 or smaller) there are sometimes no perfect matches to their requirements and for medium to larger tenants (above 300m2) then there can be a dozen or more.

It’s only natural to push for a good deal, it makes sound business sense and haggling is built into the DNA of many us but folks if you ask for a discounted rental, free fitout and any other inducements totalling the equivalent 2 years rent free on 3 year lease then you will lose credibility with your prospective landlord, your real estate agent will give up on you and you will have WASTED YOUR TIME.

So whats a good deal then? Well thats a “how long is a piece of string” question but at a full ‘market’ rent then the equivalent of 2 months rent free for each year of term certain (the length of lease before renewals) is very very good.  And that includes the value of fitout and partitioning which is existing. But don’t let me put you off, be bold, you might be surprised what a good deal you can achieve in this market! Call me if you want some perspective on your leverage.

The above is the title of a new book by 2 american HR consultants from The Future Workplace and it offers insights and predictions of how globilisation, the use of social media and the wide mix of generations working together will change the workplace. The authors Jeanne Meister and Karie Willyerd blend a number of existing trends and predict changes in the workplace will be largely led by the ‘millennials’ i.e. those born between 1977 and 1997. They will constitute 47% of the workforce and will drive many culture shifts because of their ease of use of social media and mobile devices.

They predict that personnel will be recruited by social media and assessed by how they can use social media. Blogging will be part of every CEO’s job description because blogs help others understand you and your company.

The other culture change will be the need to accommodate 5 generations of workers, obviously the millennials will supply workers in their 20’s and 30’s and a higher participation of older workers up to their late 60’s which means companies must accommodate widely for working and learning styles.

The authors also provide us with new jargon terms to use in this new culture like ‘micr0-feedback’, ‘reverse mentoring’ and ‘uber connected’.

I am more interested in the Workspace of 2020, in other words how will the physical environment need to change to accommodate the new workplace? We may be driving silly looking bubble cars powered by hydrogen or compressed air controlled by computers which stop us from speeding or crashing into each other but I don’t think our office spaces will look like something from the Jetsons cartoon show. Buildings are more permanent structures after all. Firstly I think that those who predicted the demise of the CBD and office space some time ago on the emergence of broadband internet and e-shopping will still be wrong by 2020. The fact is that people are social creatures and like interacting with each other, collaborating and sharing goals and projects together, not to mention the need to interact with clients all of which is most easily achieved in a central location.

Looking back on some of the fashionable trends like kidney shaped desk units Don Smith of CoreNet New Zealand (http://newzealand.corenetglobal.org/CORENETGLOBAL/NewZealand/About/Default.aspx) believes office users are returning to simplicity with a focus on using and accessing technology. Don is involved in the new IRD headquarters where rows of 1800×900 desks will be set up, upper management will occupy open areas and it is envisaged that many departmental structures will break down or soften as workers move around desks to collaborate with others on projects. Agility is the key which he defines as flexibility with speed.

The buildings  and floors will look much the same and workers will not necessarily be compacted together for efficient ratios of sqm per head. Computers and phones will be more compact, mobile and cordless and the office spaces will predominantly beopen plan layouts with meeting rooms. Adoption of green features to control environments and manage water etc. will continue to be rather slow according to Don Smith. Popular with public sector tenants, green buildings are expensive to build  and tenants have to be convinced of long term savings.

So how prepared are you for 2020?

The residential property markets likewise are in the doldrums. John Key and the Tax Working Group (TWG) combined in January to kill investor enthusiasm with the impending loss on tax deductibles. Residential agencies report listings surge (up 47% from January) and sales stall, the February median price was 7.7% down from January.

The best we can say is that we are bouncing along the trough of the real estate and economic cycles. I think the TWG’s suggestion of the introduction of land tax and CGT and eventual confirmation of the loss of depreciation has created the biggest hit to investor confidence for probably 20 years in this country. The government is determined to take heat of the housing market and force down the affordability index as encouraged by bank economists and the capital markets who mourn  the loss of investment in the share markets.

What of the commercial real estate markets? I think the potential for 2010 is immense. Commercial offers higher returns, better tenants and easier management. There has never been a better time to secure cashflow positive commercial property. When can you say that about residential?

The biggest challenge has always been to secure reasonable quality stock as vendors hang onto expectations based on old valuations. However a number of Property Funds will have to downsize their portfolios this year in order to cut debt and I have no doubt bank pressure will be brought to bear as further valuation write-downs and vacancies cause mortgagee nervousness. In terms of activity 2010 could be a record year!

I see canny investors leaping before the herd and trading out of residential or out of small commercial to large where the returns are best. A number of vendors will take residential portfolios as part trade where they have the capacity to sit on the properties  and sell down when that market recovers. So try your luck! Smaller investors ($50-500k)also have the opportunity to buy into securitised funds and therefore gain exposure to better quality property. These funds are usually run by experienced players with an eye for a good bargain and management experience.

Hang on 2010 is going to be bumpy!

Firstly he notes an uptake in the savings rate to a return of about 10% and debit cards have become more popular than credit cards according to Visa. The culture has changed he claims from mindless consumption to mindful consumption, and by restricting their spending consumers can align their spending  with their values and thereby drive business to be about being better rather than being about more. He identifies four value shifts to post-crisis consumerism;
1.     Déclassé consumption is the idea that frivolous consumption is unfashionable. He points to falling demand on luxury brands and high-end real estate and increasing interest in eco-tourism.
2.     Consumers not only require value but values and fair play scrutinizing the cultures of companies and their conduct. Not only has there been a rise in volunteerism but corporates have become involved in numerous community activities outside of their commercial reach.
3.     Durable living suggests that consumers look to extract value out of every purchase. Americans are apparently holding onto their cars for longer, accessing more libraries and education, DIY spending etc. He points to a new phenomenon of gardens and backyard chickens which reflects a change to sustainable thinking and taking care of yourself. He claims companies must align with social responsibilty, promise to helping the customer after the sale or make a statement about their ethics e.g. fair trade coffee.
4. Cooperative consumerism is about connecting to social networks. He claims 72% trust what other people say about a brand or company whereas 15% are convinced from advertising. Buying local provides connection on one level and some companies use networking to help customers to communicate and with common interests (mommy bloggers site called ‘momversations’ on Johnson and Johnson’s website). Some CEO’s (he points to Fords and Zappos) are using Twitter to speak to employees and the market providing values of  transparency and openness.

Values driven spending Gerzeme claims will force capitalism to be better, driving innovation making longer lasting products and better intuitive customer service giving us the opportunity to identify and connect with companies that share the values we share.

Heady stuff eh! So Gerzeme claims that business must align with a change a values driven culture, consumers are unwinding their debt leveraged spending to more sustainable and sensible behaviour. Companies must become socially responsible offer their products which offer value and values to a discerning and motivated public. I think we can identify numerous examples of NZ companies working to these same value shifts, BNZ’s Closed for Good campaign. So in this context the challenges to the real estate/property industry are obviously immense, I look forward to your comments and views as to how we might meet them!