Commercial landlords may need to adopt new ways of calculating rents for their properties in the post-lockdown world, according to an expert in the hard-hit hospitality sector.
Adrian Chisholm, a director of Tourism Property Brokers, which specialises in the sale and leasing of tourism and hospitality-related businesses and properties, says both landlords and tenants may need to start thinking of rent as a variable cost, based on the tenant's turnover, rather than a fixed cost.
At present, most commercial leases charge a fixed amount of rent each year, with clauses that allow the rent to be increased or adjusted at set intervals.
Some tenants will simply not survive in the post-lockdown era if their rent remains at pre-lockdown levels, because their turnover will have reduced so much.
Chisholm says the first thing that both landlords and tenants need to do is work out whether the tenant's business is facing a short term cash flow issue or a long term viability issue.
If it is a short term cash flow issue, where the tenant suffers a reduction of turnover during the lockdown and for a period afterwards, after which revenue begins to climb back towards normal levels, it may be possible to solve the problem with rent deferrals, where the landlord reduces or abates rent in the short term on the basis it will be repaid further down the track when business picks up.
But some tenants may be facing a situation where their revenue could be substantially reduced long term, making their business unviable if their rent is kept at pre-lockdown levels.
This problem is compounded by the fact that many if not most businesses probably won't know how much their revenue will have dropped to once the lockdown ends, and how quickly it may pick up.
Chisholm says in such situations an interim solution could be for landlords to adopt a variable rent regime based based on their tenants' turnover.
Each month a tenant's turnover could be compared to their turnover pre-lockdown or their average over the previous year.
That percentage could then be applied to their monthly rent.
The percentage of turnover figure could be confirmed by an accountant each month.
This would inevitably mean a reduction in rent which could be quite severe, immediately after the lockdown.
But it would also allow the rent to rise as the fortunes of the tenant's business improved.
The alternative for the landlord may be to lose a tenant.
"Some rent is better than none and it is important to preserve a good tenant," Chisholm said.
"A vacant building will still incur outgoings and will require incentives in this new market to attract a new tenant.
"Tenant demand will be limited to those willing to undertake a new fitout in an environment where leasehold lending facilities will be hard to secure.
"The parties need to accept they are joined at the hip," he said.
Chisholm said he saw a move to variable rents as a stopgap measure, until the market settled to a new level in the post-lockdown world.
"But that could be two years," he said.
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13 Comments
There has likely been an overbuild of commercial floor space over the last few years. Tenants like ourselves (IT) are just gonna let the lease expire: working from home has always been part of the equation and the toolsets around now are superb. There are two adjacent small spaces to us that have never leased since being fitted out (3 years) and in Christchurch, I did hear whispers mid last year that commercial vacancy rates were north of 20%, not that the local cheerleaders would have put That in the MSM. Percentage of T/O works only where it can be quickly and simply verified, would be most useful for simple businesses like cafes, and is vastly complicated for branches, partnerships, and other such arrangements.
Waymad, what area of Christchurch has two commercial offices that haven’t been rented in 3 years?
We own a large warehouse and offices and had demand for it as soon as it was known the tenant was moving on after a long occupation!
No down time whatsoever so there must be something very wrong if you can’t rent space after 3 years!!
In Addington, I see many new and nice places who have been empty (with gigantic "this is your last chance" signs) for more than 3 years. Chc retails was struggling mighty before COVID-19, empty restaurants a plenty, too many taxies and ubers and too few passengers, etc. The city does not show any signs of a vigorous local economy. Only thing here are: construction (that was significantly winding down) and cars (so many car dealership, so many mechanics).
All the business parks outside the city center are getting hammered as people move closer to town, Addington and William Pickering Drive are particularly badly hit - I'd swear 1/3 of Sir William Pickering Drive is empty and has been for years. From memory commercial vacancies got up to around 26% last year - not sure where they are now - Colliers seemed to conveniently not cover Christchurch in some of the reports I read.
While there will be a lot of pain I think one of the best things that could be done to stimulate productivity in the productive sector is a massive drop in commercial rent. Holding rates up served a purpose post-quakes by giving developers false confidence around being able to get good returns in the market & hence rebuilding but the high rents have and will continue to stifel independent retailers and businesses alike.
Personally i havent seen any of these buildings empty for 3 years anywhere in ChCh, and I doubt there are many if any!
A landlord would have sold it before 3 years is up I would’ve thought?
I note that Way ad hasn’t been back to answer my question has he!
Probably just another one of these made up stories that we often get on here.
Why did that long term tenant 'move on'?
Went out of business after a long time?
Found somewhere cheaper to rent after a long time paying too much?
And, when was this? Recently? Last year? 5 years ago?
Unless there are a few more details, it's hard to compare your post with others here.
(eg: a long time acquaintance ceased business out of a fairly large warehouse/offices complex on St. Asaph Street; just down from ANZ, some 5 years back. Last time I was down there, it was still empty ( 2 years ago), even after all the major sewerage works had 'upgraded' the street and made the road more user friendly)
The tenant had been in our building for nearly 20 years although we have owned it for 15 years.
They moved last year as they had a purpose built building built for them.
We filled it straight away with no down time whatsoever and kept the same rent, which gives us a15% yield on purchase price.
Thanks for such amazing uplifted report.. we need that during this lock down. NZ need this F.I.RE enthusiasm to flow on to Q/town, Wanaka & West Coast area too, hope your energy branch out there. It would be nice to hear in near future that Chch Bright Glitter Message carry on to nearby provinces too. Soon those jobs on the line/already loose the job, will move to Chch & with help from govt. to buy into own home, which in turn can be used to borrow more loan into more productive RE activities eg. becoming private or commercial landlords. Well done !
Commercial property owners are in for a hiding. We are one, and increased vacancies will result in reduced rentals. I would suggest those geared 50% or more are gone, unless they have essential tenants or can pay down debt to a level they can support.
There is going to be an extended period of vacancy, and 20% of the economy is not coming back anytime soon.
We are geared very conservatively, as we saw the net yields people were paying was a disaster waiting to happen. Experience gives you a better understanding of risk, and the returns being accepted did not reflect the risk.
This was all aid and abated by the banksters, who care not for the community but there own personal bonuses and overseas shareholder profits. Can anyone justify to me why these banksters deserve $5 billion profit per annum (exported) when all they are is parasite middlemen? If I was in charge, I have their board and executive locked up for abuse of power.
Generous assessment of negatively geared landlords G_Sammy. Even positively geared landlords are at risk. No tenants = no income period.
A Potential downsizing effect to happen as business revenues decline further and don’t recover. Larger business to smaller premises and smaller businesses back home where possible. Lease agreement depending.
We have offered up to 90% off for tenants depending on whether they are reliable. Difficult tenants not one bit of leniency.
"Experience gives you a better understanding of risk, and the returns being accepted did not reflect the risk."
I agree 100%, in recent years when I have mentioned the ridiculous yields on commercial properties in my area (I own industrial, disclaimer) I've been treated like a leper. I have seen properties lose $500k - 1mil over 5-7 years pre 2013. People seem to blank these from their minds and or put there fingers in their ears looking at the ground when you mention it. I guess that's why a certain stage of the bubble cycle is called "irrational exuberance".
Now, it's the same like Private Landlords, Commercial Landlords should ask for local council rate reprieve and central govt future tax payers hand out, Both govt (specially future blue team?) - will give a significant assistance funds. The essential services provided by this critical part of the F.I.RE economic activity, reflected on announcement by PM, Ministers, Councils, RBNZ - all measures of economic first aids during adverse event are focus on this area, this moves is to re-assure NZ public to keep on investing/support this investment scheme.
Don't, just get like this fella act quickly - whilst the muddy water around Covin19 56.6mil for Maori, wages subsidy around.. once you get it? buy a more property, all economic safety measure is to save F.I.RE economy:
https://www.stuff.co.nz/business/121254612/coronavirus-business-owner-p…
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