Industrial property has traditionally been viewed as a relatively resilient part of the commercial property market. But that doesn’t mean every property, tenant or lease is insulated from tougher economic conditions.
The conversations happening around the negotiating table are giving us a useful view of what tenants are dealing with right now.
Across some of the lease negotiations our property management and leasing teams are currently involved in, we’re hearing common themes in what tenants are asking for, where they’re pushing back and what they’re prepared to commit to.
For owners, that is valuable market feedback.
A lease may say a market rent review is due. An owner may want a longer commitment. On paper, a property may appear straightforward to re-lease. But the conversations actually happening with tenants can tell you something different about the decisions businesses are making in the current environment.
That doesn’t mean owners should automatically concede on rent, lease terms or other conditions.
It means timing matters, and so does having a realistic view of the market before making a decision.
Here are some of the common things we’re seeing and hearing from our tenants at the moment and what they could mean for Auckland commercial property owners.
1. Some tenants are looking for shorter renewal terms
One conversation we’re seeing is tenants seeking shorter lease renewals. Rather than committing for a longer period, some tenants want to retain more flexibility.
For an owner, the initial reaction might be to push for the longest possible commitment. But the better starting point is understanding why the tenant wants a shorter term and what accepting it would mean for the property.
Is the tenant uncertain about their future requirements?
Would they consider a longer commitment under different terms?
What does a shorter lease mean for the owner’s longer-term plans?
And importantly, what is the alternative if an agreement cannot be reached?
A shorter renewal may retain a good tenant but bring the next lease event closer. A longer term may provide greater certainty, but only if both parties can agree on the conditions.
The term itself is only one part of the decision.
2. Longer commitments are being negotiated in return for investment in the building
We’re also seeing lease term become part of a wider negotiation around the condition of the premises.
A tenant might initially be considering a three-year renewal, for example, but be prepared to commit for five years if the landlord agrees to undertake certain improvements.
That could include items such as carpet, blinds, bathrooms or other agreed works.
For the owner, the question shouldn’t simply be:
“How much will these works cost me?”
It should also be:
“What am I receiving in return?”
If investing in the property secures an additional lease commitment from a tenant the owner wants to retain, that changes how the expenditure should be assessed.
The owner can consider the cost of the works against the additional lease term, the condition of the building, whether some of the work may be required regardless, and what could be involved if the existing tenant leaves.
This doesn’t mean every request for landlord works should be accepted.
It means capital investment can become another negotiating lever rather than simply being viewed as a cost.
3. Market rent reviews are being negotiated back towards CPI
Another conversation our property management team is coming across involves market rent reviews. Where a market rent review is due, the landlord or property manager may seek to adjust the rent to the current market level. In some current negotiations, however, tenants are resisting that increase, which then leaves the owner with a decision.
They can continue to pursue the market rent position, or they can consider negotiating an alternative increase that both parties are prepared to accept.
In some cases we’re seeing owners agree to an increase closer to a CPI (Consumer Price Index) adjustment rather than pursuing the full market rent increase.
Why? Because the rental figure isn’t the only consideration.
If pushing for the market increase puts a good tenant at risk of leaving, the owner also needs to consider what that could mean for the property.
That doesn’t mean CPI is automatically the right outcome, or that owners shouldn’t pursue market rent.
It means the decision needs to consider the tenant, the lease, the proposed increase and the realistic alternative if the tenant decides not to stay.
Sometimes the better decision is not simply the highest rent that can be argued for on paper.
If you have a rent review or lease renewal approaching, understanding the tenant and leasing position before negotiations progress can give you a clearer basis for deciding where to hold firm and where there may be room to negotiate.
4. Tenants are asking for rent-free periods and other incentives
Incentives are also coming into some renewal conversations. That includes requests for rent-free periods.
For landlords, the important thing is not to assess the incentive on its own.
The better question is:
What does the owner receive in return?
Does it resolve a negotiation that might otherwise result in the tenant leaving?
How does the proposed outcome compare with the alternative of taking the property back to market?
An incentive is a cost to the owner, so it needs to achieve something commercially useful.
Equally, automatically refusing an incentive without considering the wider position may overlook what the owner could secure in return.
The negotiation needs to be assessed as a whole.
5. OPEX is becoming part of the cashflow conversation
Not every change we’re seeing relates to rent or lease term. We’re also having conversations about how tenants pay their share of property operating expenses.
Rather than waiting until costs such as rates fall due and then on-charging the tenant a larger amount, some tenants are asking for operating expenses to be budgeted and collected progressively through regular monthly contributions. The actual costs can then be reconciled against those contributions.
This doesn’t necessarily change the tenant’s underlying obligation to contribute towards the relevant operating expenses. What it changes is the timing of the payments.
Instead of facing a larger periodic outgoing, the tenant has a more regular and predictable payment structure.
It’s another example of why current lease conversations are not necessarily about owners simply giving something away.
Sometimes the issue is how an existing obligation is structured in a way that works more practically for both parties.
What do these conversations have in common?
Taken together, these conversations point to tenants being more cautious about commitment, occupancy costs and cash flow.
For owners, that matters.
A lease may provide for a market rent review or an owner may have a preferred position on term, incentives or property investment. But the outcome still needs to be considered against what tenants are prepared to agree to in the current market.
That is where real market feedback becomes important.
The market matters more than the position on paper
Holding firm may be the right decision. In other situations, retaining a good tenant on slightly different terms may put the owner in a stronger position than taking the property back to market.
The important thing is knowing what that alternative actually looks like.
Current tenant demand, likely rental levels, expected time to secure another occupier, the condition of the property and what a new tenant may require should all inform the decision.
This is particularly important in a tougher market. Industrial property may be resilient, but that doesn’t mean every property will lease quickly or every tenant will accept the terms an owner expects.
Better decisions start with real market feedback
Market timing isn’t about waiting for the perfect moment or trying to predict what happens next. It’s about knowing what is happening around your property now.
The conversations we’re having with tenants provide owners with real-world feedback on what businesses are prepared to commit to, where they’re pushing back and what it may take to get a lease agreed.
That information can help an owner decide whether to hold firm, negotiate, invest in the property or consider the leasing alternatives before making a decision that could result in vacancy.
Have a lease renewal, rent review or expiry approaching? Talk to Commercial Realty about what we’re seeing in the market and what it could mean for your property.
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FAQs
Why are some commercial tenants asking for shorter lease renewals?
In some of the negotiations Commercial Realty is currently involved in, tenants are seeking shorter commitments and greater flexibility. The reason will vary by tenant, so owners should understand what is driving the request before deciding whether to accept it.
Should a landlord pay for improvements in return for a longer lease?
It can make commercial sense in the right circumstances. The cost of the works should be considered against what the tenant is prepared to commit to in return, the property’s condition, the value of retaining that tenant and the alternative if they leave.
What happens if a tenant refuses a market rent increase?
The appropriate response depends on the lease and individual circumstances. Commercial Realty is currently seeing some owners negotiate an agreed CPI-based increase rather than continue to pursue the market increase where retaining the tenant is considered important.
This article is not legal advice on the landlord’s or tenant’s obligations under a particular lease.
Are tenants asking for rent-free periods when renewing leases?
Commercial Realty is encountering requests for rent-free periods and other incentives in some current renewal negotiations. Owners should consider what they receive in return rather than assessing the incentive in isolation.
What does paying OPEX monthly mean?
Instead of larger operating expense on-charges being payable when particular costs fall due, estimated OPEX contributions can be collected progressively throughout the year, with the amount later reconciled against actual costs.
Is it better to keep an existing commercial tenant or find a new one?
There is no single answer. Owners need to consider the existing tenant, proposed lease terms, likely demand for the property, potential vacancy and what may be required to secure another tenant.
When should I start preparing for a commercial lease renewal?
Ideally, before the negotiation becomes urgent. That gives the owner time to understand the tenant’s intentions, review the lease and property, and consider the alternative leasing position before deciding how to negotiate.