The Christchurch commercial property market experienced disruption following the Canterbury Earthquakes. Prior to the earthquakes, increasing vacancy rates and shorter lease terms evidenced what was effectively a 'tenant's market'. Tenancy inducements were on offer to attract quality tenants whilst rental growth and investment demand remained relatively flat.
Post-earthquakes we have seen significant changes in the market. Limited supply resulted in fewer vacancies, longer lease terms, and limited inducement offers by landlords.
As the rebuild progresses the central city is starting to take shape with many private sector developments either completed or nearing completion. The BNZ Centre and The Crossing opened earlier this year and The Terrace is due to open before the year ends. In the government sector, the Justice and Emergency Services Precinct opened with a public viewing in September 2017 and other anchor projects including the East Frame and Convention Centre are under construction.
Office supply is nearing pre-earthquake volumes and the construction of new offices in the CBD has dropped off sharply. Office vacancy rates in the suburbs are expected to increase as more businesses make the move back into the CBD. New industrial developments throughout Canterbury (including developments in Belfast, Rolleston, and Hornby) have created enough industrial land to keep the Canterbury market supplied for years to come.
What are we seeing and what does this mean for landlords and tenants?
As vacancy rates increase, we are seeing shorter lease terms with multiple shorter rights of renewal, instead of long initial lease terms. This works in the tenant's favour, as it means the tenant is not committed to the premises for a long period. The tenant retains the ability to remain in the premises long-term by exercising the various rights of renewal contained in the lease.
Tenancy inducements are becoming more prevalent as landlords seek to attract quality tenants for long term leases. Tenants should be considering whether an inducement is appropriate for any lease they are proposing to enter into and the quantum of the inducement. Landlords need to consider how any inducement is structured (i.e. a rent holiday, contribution to fitout etc) and the long term effect of an inducement on both the lease and the value of the property (for bank funding or in the event of a sale).
With limited projected growth in market rents in the short and medium term, consumer price index (CPI) rent reviews and fixed percentage rent increases are gaining favour among landlords. Where a lease will contain market rent reviews, landlords should consider inserting a 'ratchet clause' to prevent a lower annual rent should market rents fall.
Reinstatement and tenant fitout are more often becoming subjects of dispute in lease negotiations and on the expiry or assignment of a lease. Reinstatement disputes are easily avoided by providing for a premises condition report in the deed of lease. Relatively easy to prepare, a premises condition report for smaller premises can be by way of photos of the area being leased. Any landlord's fixtures and fittings should be clearly identified and photos showing their condition included in the report.
Properties are taking longer to lease than immediately post-earthquakes. CBD office construction is declining as stock returns to pre-earthquake levels and CBD office vacancy is expected to improve as more businesses return to the CBD. There is an abundance of industrial land produced by a number of new developments throughout Canterbury. In the retail sector, the completion of private sector developments and key tenants returning to the CBD are positive factors. New retail developments underway in the central city include the Riverside Market complex as well as the Hoyts ENTX development.
Generally, lease terms are shortening and tenancy inducements are becoming more common. More landlords are opting for CPI rent reviews or fixed rent increases in new leases, while market rent reviews are expected to work in a tenant's favour over the short to medium-term. There is still strong demand for investment properties, as evidenced by recent sales including the PwC Centre and Tait Communications.
Factors likely to affect the market going forward include Canterbury's population growth, increasing building costs, lack of short term rental growth, and supply and cost of debt.
The Commercial Property Team at Cavell Leitch has a massive store of knowledge in this area so if you are a landlord or a tenant looking to enter into a new lease then please call one of our experts today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.