Commercial Property - Very Little For Sale.

[Glenn]

Hi Glenn,
Question for you please. And you do not have to answer it (could be commercialy sensitive)
You have several out of 14 floors vacant ...
Would you get tenants in for say 50% market rent to get the wheels turning ? Some $ better than no $ so to speak ..
e.g. 1st 2 years at say 50% based on signing up for say a 4 x 2.
Or is it a sizzle, not the sausage scenerio ? By that i mean the viaduct harbour in Auckland at way higher rents sucked many tenants from the CBD some years ago.
As in many corporates were bugger the economies of it, we want the flash stuff.
Be interested to hear your thoughts.

Hec

I do not manage this property. Way down the feeding line, so I do not see the whites of the native's eyes before shooting.
However I am sure the same principles that apply in Nelson apply over there.
Firstly as property managers here I am always careful to not create a trend bigger than is already there. (I hope you can get the meaning of that vague statement).
Secondly if you put the wrong mix of tenants into any sort of close living / operating be it residential or commercial you will well and truely stuff up things for years.
By that I mean do not put a brothel in with lawyers and insurance agents. Or food in with ...
Thirdly I have found generally in residential it is possible to drop the rent by a small margin and you will always attract a tenant.
The same principle does not apply in commercial. Having said that when the market gets like it is today the rule is rules do not work.
Residential is so much bigger with that great big grey mass. Every tenant needs pretty much the same thing like kitchen, bathroom, bedroom. However the commercial is way wider. Of course a 14 story monster is looking for a small slice of a wide commercial sector need. Retail on the ground and office (almost) only above.

I have found in Nelson whilst looking for a fringe CBD light retail / warehousing tenant that even when I advertised 6 months free there were no serious takers.
I have been told that the market is now looking for fit outs, rent free holidays, and earth quake ratings.

So if you get the drift of what I am saying. It is always imperative to look after the interests of the existing tenants. Fail to do that you will loose them and even if you have a good building around the corner you might not be able to attract them or their friends because you the property manager or big time landlord get a bad name.

[Davo36]

do not put a brothel in with lawyers and insurance agents

No you'd upset the brothel.

Seriously though, Hec, you don't lower the rent if you can avoid it with commercial. This is because the rental level directly affects the value of the building. So if you have a $100,000 rent, using a 10% cap rate, the building is worth $1 million. If you drop the rent by half, your building is now worth $500k. You've just lost $500k on paper at least.

And so over the last few years there have been people with office buildings unable to lease them - because to do so they'd have to drop the rent a lo - AND their banks wont' let them do that! Because then the bank's security would be severely affected. Like if the bank had lent $600k on the above property, then the bank would be out of pocket, so they force the owner not to lease at anything too much under the notional market rent.

But that's quite unusual, what is more usual is for the landlord to offer incentives to get tenants in. So they leave the rent at $100k pa but they offer 6 months rent free, offer to redo the fitout to suit the tenant and so on. And this costs money but it preserves the value of the building.

The trouble comes when even if you offer all of this, no one wants your building!

[Wayne]

Seriously though, Hec, you don't lower the rent if you can avoid it with commercial. This is because the rental level directly affects the value of the building.

Well yes and no. Interesting point about the bank 'won't let you' drop the rent as the value will drop. Currently I am letting a commercial for half what I was previously getting after 18mths with no tenant (I had even considered letting for outgoings only!). The mortgage is very low so not an issue with the bank but I wanted someone paying the outgoings (rates and insurance don't stop because it is empty - the really anoying bit was paying water (connection fee) with no useage). I am playing the long game - the tenant moved in and only used half the building. After 18mths they are using the whole building! Get them in, get them used to being there, get them liking the place and the rents will rise. 10% in the lease for year 2 and negotiable from there. I don't expect it will double at the next review but in a years time the market will (hopefully) be differant giving me a stronger hand. As I say - playing the long game, fortunately I can afford to.

It has been a learning experiance and fortunately not a very expensive one. I do wonder if I should have worked harder to keep the last tenant but they moved and went bust 6 mths later so I don't feel too bad.

[Ivan McIntosh]

No you'd upset the brothel.

Oh, ho ho ho

Actually there is a well known case (amongst property lawyers, anyway), where a law firm did find itself with a brothel two floors up, and successfully cancelled the lease on the basis of "derogation from grant", which I won't go into here.

Anyways, I'm of the opinion that it is better to keep a property tenanted, but I've seen plenty of examples of the type of cut-your-nose-off-to-spite-your-face refusal to lease at a lower figure. Sometimes all the incentives in the world won't induce a tenant to sign up to a lease with a ratchet clause and a high face rent....and generally these are the better more savvy tenants who are thinking long term. It's the short termers that are happy to grab a big incentive package, because they're not looking further ahead than one term.

[Hec]

Thanks Glenn and everyone,
some really good points there.
Like the 6 months rent holiday under the umbrella of the head rental.
Interesting also as i know a good friend right now paying 1/3 rent from previous. (under the original rent still on paper - for the LL's bank?) and this the land lord offered to keep him there.
Market distortions for the unwary.
Thanks again all,
Hec

[Wayne]

Speaking of rent holidays - make sure it is a rent holiday not and rent AND outgoings holiday.

[Davo36]

Wayne where is this property located in the country?

Ivan, yes of heard of that case but I thought they were able to cancel the lease using the Quiet Enjoyment clause in most leases.

Hec, yep there are heaps of these kinds of things that go on in the commercial property world, so you have to be very careful.

[Wayne]

Hamilton of course.

[Davo36]

Hamilton of course.

Hamilton can be a bit tricky. Not sure why. But seem to hear stories like this about Hamilton.

I think you're doing the right thing by letting at a lower rate and building it up over a period of years. Hopefully you'll be back to where you were shortly.

[DaveW]

ok I'm in a position to buy something.

I don't buy into the negativity about different areas going this way and that way, lets just leave that to the daily b***sh*t newspapers. Commercial property doesn't make good reading to the general public.

My buying rules are typical. Location, split risk, and add value. If you have to buy at a low yield to tick those boxes then that is what I do. Negotiate terms if you can't afford it.

Even if you are a passive investor I still stick to those rules. Rents are going to increase.

[Maccachic]

The Commercial leasing / sales guy I know in Tauranga is getting pretty busy these days.

He was saying there is a large block of property here which is on leasehold land, the rent for land has increased 30-36% over 5 years depending on who was negotiating for you. Heres another http://www.nzherald.co.nz/business/n...ectid=10797679

[Davo36]

ok I'm in a position to buy something.

I don't buy into the negativity about different areas going this way and that way, lets just leave that to the daily b***sh*t newspapers. Commercial property doesn't make good reading to the general public.

My buying rules are typical. Location, split risk, and add value. If you have to buy at a low yield to tick those boxes then that is what I do. Negotiate terms if you can't afford it.

Even if you are a passive investor I still stick to those rules. Rents are going to increase.

Oh well, let us know how you go.

[DaveW]

Maybe I should create a blog for subscribers.

[Flipper]

Should commercial investors still assume that the normal yield is around 10%, and that today's market is extraordinary?

[DaveW]

Define "normal".