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News Release


Jones Lang LaSalle predicts growth of the sub-lease market and the emergence of the savvy incentive-focused Landlord

CBD office market feels the pressure



Long term investment with development potential/new-zealand/en-gb/news/916/long-term-investment-with-development-potentialAUCKLANDLong term investment with development potential
Former Fire Station on high profile corner site/new-zealand/en-gb/news/915/former-fire-station-on-high-profile-corner-siteCHRISTCHURCHFormer Fire Station on high profile corner site

AUCKLAND, 12 February 2009 - Initial results from Jones Lang LaSalle’s bi-annual office vacancy survey indicate an emerging sub-lease market, which has grown over the last six months and is expected to accelerate over the first half of 2009. While the final counts are still in progress, initial findings point to headline vacancy rates edging up slightly, whilst behind the scenes levels of sub-leasing rise significantly as businesses look to respond to the current global recession and reduce mounting pressure on their bottom line. Conservative estimates of Auckland and Wellington CBD’s upper level market for sub-lease is around 20,000 sqm and is likely to continue growing.
The pressure on many corporate occupiers over the last six months of 2008 has been significantly tested.  Major corporations around the globe, some in business for over a century, have closed, merged, been bailed out by the government or are looking to recuperate after a significant upheaval to their normal business operations.

John Church, National Leasing Director of Jones Lang LaSalle New Zealand says, “Over the next 12 months we will see businesses demonstrating real courage in the face of adversity, but unfortunately some will not survive or at the very least many will inevitably reshape and reposition their business accommodation needs. This poses a major challenge for Landlords in attracting and retaining the right occupier in 2009.”

“What was once a simplistic leasing model with a relatively laissez-faire approach in a rapidly expanding economy has become more complex. Throw out your old edition leasing rulebook and make way for the new 2009 edition. Previous leasing techniques will not provide the suitable outcome in this tougher market. In order to survive, Landlords will need to be savvier in seeking and securing the recession focused tenant,” continued Church.

A common theme identified by Jones Lang LaSalle’s office leasing team is the acceleration of incentive offering from landlords in order to finalise some deals.  Steve Rodgers, Head of Wellington’s leasing team, concluded one the largest 2008 leasing deals in Wellington and has noticed the re-emergence of incentives from Landlords over the last six months. 

Rodgers says, “Some Landlords are starting to realise the value that a new tenant can bring to their property and are starting to shift their focus from preserving their asset values through ratcheting rental levels, to preserving their cashflows and are introducing incentives to new lease deals, particularly for large space requirements. Typical incentives we are seeing are rent free periods, Landlord fit-out contributions, cash inducement payments or Landlords taking on incoming tenant’s lease tail obligations, particularly of older lower quality space.”

Significant rental escalation experienced over the latest period of economic growth and business expansion is expected to diminish over the short-term.  “While a number of firms are still facing increased rents due to lengthy rent review periods, declining corporate profit has impacted some occupiers’ ability to absorb further rent increases,” says Chris Dibble, Manager of Research and Consulting at Jones Lang LaSalle New Zealand.  “As a result rent review negotiation periods have lengthened with a number of rent reviews in legal proceedings. It is expected that in light of current market conditions, landlords are likely to forgo rental increases over the short term in return for healthy occupancy levels,” says Mr Dibble. 

While NZIER have forecasted a March 2010 year improvement in economic activity, many are predicting a more dire set of circumstances.  Economic growth in New Zealand has been non-existent in 2008, with Hong Kong, Singapore and Japan following our footsteps into recession. The Asia Pacific giants of India and China were set to provide the region with the necessary cushioning and soften the brunt of the storm, however, a raft of negative indicators and worrying trends continue to emerge.  Many countries around the world are now feeling the full effect of the meltdown that occurred in the US since mid-2007.  

The second half of 2008 will prove to be a period many will remember although wish they could forget.  It is expected the impact of the storm will continue for a long time, not only in New Zealand, but globally as well.  Nick Hargreaves, National Sales Director of Jones Lang LaSalle New Zealand notes, “The global property market continues to be plagued by the dual challenges of tight credit and a rapidly weakening economy.” 

“Despite the OCR cuts, financing rates have been very slow to come down. Only meagre amounts of liquidity are available, with suitable loan to value ratios supported by adequate cash flow primary requirements by the banks.  The workout in the debt markets will be slow,” continues Hargreaves.

A trend accelerating in acceptance is the increasing involvement that major lending institutions and financial lawyers are playing in the market.  There is an increasing realisation that a more pro-active management approach is required in order to achieve a more suitable outcome for all involved.  “Rather than stringent default triggers in loan covenants and a reluctance from banks to restructure or re-issue loans leading to receiverships, more practical measures are being undertaken,” says Hargreaves. 

While the 2009 outlook is looking relatively subdued, there are several key signs that may provide the steps to recovery.  These include proactive fiscal and monetary policy, declining inflation, exchange rate depreciation, changing focus from major lending institutions and a gradual increase in pipeline sales and leasing activity.  The re-emergence of the high-net-worth investor and property investment syndicates are likely to provide a boost of confidence to the marketplace.