THE economic downturn has created a conundrum for commercial property owners with vacancies rising and rentals under pressure.

Rawson Properties MD Tony Clarke says that it is now evident that in the major commercial nodes and shopping malls vacancies are growing.

“As always in economic downturns, a surplus of space is leading to a situation in which rentals are under pressure,” he says. Tenants, says Clarke, are increasingly aware that regular 8% or 9% sometimes higher annual rental increases now make their premises more expensive than others newly available on the market.

“Tenants are likely to move on once the lease expires.”

Landlords, on the other hand, are faced with the difficult situation that if they lower their rents to meet market conditions and attract new tenants to their vacant spaces, their existing tenants will soon also start demanding rental drops.

“The subsequent loss in revenue to landlords can be quite serious,” Clarke says, “because over the last 24 months new leases have often been at 15% to 20% discounts. “With the tenants now quite clearly holding the whip handle, landlords have to be ‘creative’ about what they offer clients.

“Many are reducing the new tenants’ short-term costs, but compensating for this down the line. For example, in the initial two years the lease might be at a discounted rate and on the balance of the lease period, the tenant pays a catch-up premium,” he says.

Clarke says his company finds that unless the tenant is a blue chip firm with a lengthy lease, landlords are often reducing initial fit-out costs as well.

Landlords, says Clarke, must now strive to hold on to their existing regularly paying tenants. “Landlords should bear in mind that good service, good maintenance and good facilities especially these days as regards parking will often induce the tenant to accept a rent at a higher than-market rent value,” he says.

Particular care, Clarke says, should be paid to controlling the extra costs which are distributed among tenants.

“The economies of scale achieved by the big service groups often make it cheaper to outsource the management and maintenance rather than to handle them in-house.”

Clarke says that traffic congestion and petrol costs have led to many tenants seeking premises nearer their home base.

Security concerns and a liking for leafy surrounds have boosted the attraction of enclosed, guarded parks and the dramatic demographic shifts seen among office staff in the last decade have made any office close to major railway or bus stations very sought after.

In Gauteng the new Gautrain and rapid bus systems is expected to spawn new developments along the routes they follow.

Source: Business Day