Beware of impending landlord wars… Posted 2010, 16 February I’m predicting the commercial tenancy market is about to become a bloody battlefield as times get really tough for investors and landlords managing commercial property portfolios. There are five key factors that will cause this warring between landlords. High Vacancy Rates. On 3 November I reported that vacancy rates were over 15 percent and could go higher in 2010. At that stage the real estate industry was still in denial and reporting a rosier picture. But latest research shows vacancy levels, particularly for office space, running at highs not seen since the early 1990s. There is now acceptance that vacancy rates could hit 16 to 18 percent. Increasing Supply. Add the new office space coming on stream over the next two years to the high vacancy rate and you have one almighty glut. Auckland has 75,000 square metres due to come on stream in the next two years, and Wellington has 90,000 square metres! Legislation. The third factor that has landlords squirming is Government’s indication this year’s budget will do away with depreciation provisions for tax on rental property, plus the possibility of a land tax. Low Demand. Demand is still dropping. Many businesses continue to shrink, very few new start-ups are underway, and more and more businesses are looking at ways to cut costs by using less space and having people work remotely. Falling Rentals. Commercial rentals are falling by 15 to 20 percent in Category-A buildings. This is an indicator that rents are on the way down in all categories. If we delve into what’s happening, we can see that new space coming on stream is all largely committed to new tenancies. But vacancy levels will soar as these tenants vacate older premises to move into the new buildings. I predict the commercial lease market will turn in on itself and we will see landlords poaching each others tenants as they vie to keep their buildings occupied. While this buyers’ market might seem to benefit commercial tenants, these are very dangerous times and you must act cautiously and with expert advice. Landlords can easily sugarcoat deals to make them appear more appealing to tenants. And commercial real estate agents working on commission will continue to con tenants into believing there is a set price and terms & conditions for rental space. It takes shrewd advocacy on behalf of tenants to ensure good deals are negotiated and achieved as landlords and commercial real estate agencies go into “convince at all costs” mode in a desperate attempt to keep buildings fully occupied.