Commercial rent collection is up, but challenges remain

Friday, 8 November 2024

More than a quarter of retail property tenants left the space they rented this year, and it’s a sign of the complex times facing the sector, ReLeased says.

Retail had the lowest tenant retention rate of the four sectors ‒ industrial, office, retail, and hospitality and leisure ‒ analysed in the commercial property management platform’s new tenant health index.

Tenant retention measures the percentage of occupiers remaining after a year, and retail’s rate was 73.23% over the year to September.

But its rent retention rate was solid and its rent collection rate was 98.63%, a significant recovery from 48% in 2020.

ReLeased chief executive Tom Wallace said the picture was complex for retail property, which was dealing with the soft economy and the drift towards online shopping.

The analysis suggested that tenants who were staying put were paying more, he said.

That was because lease-to-rent variance, which reflects how much more, or less, retained tenants are paying compared to the previous year, was “notable” at 12.2%.

“It is likely due to rent increases, larger spaces, or investments in premium locations, and it highlights a segmentation within retail,” he said.

“Prime tenants are absorbing rising rents because prime trading space is sought after, while many traditional retailers face growing challenges, and a proportion of small operators are leaving their spaces.”

For landlords, rent retention in key areas was encouraging, but incentives could be required in non-prime locations, he said.

ReLeased’s analysis, which looked at 40,000 leases around New Zealand, found rent collection, tenant retention, and rental income growth across the commercial property sector as a whole had stabilised.

The average rent collection level had made a full recovery from a pandemic-induced low of 64% in April 2020. At 99% in the year to September it was back to pre-Covid rates.

Average tenant retention and rent retention rates across the four sub-sectors were 80% and 88% over the year to September.

Wallace said industrial property led in demand, with strong rent collection and tenant retention rates, and had the highest rent retention rate at 95.50%.

There was a shortage of industrial property, and a limited amount of space for big warehouses, and that led to minimal turnover, he said.

“At the same time, the trend towards online shopping is increasing the need for warehouse space, and that’s driving demand for it. So there’s a drift from retail space to industrial.

“Landlords' have the opportunity to secure premium rents for highly sought-after warehouse and logistics space in Auckland, Wellington, and Christchurch.”

But office leasing trends were being shaped by the adoption of hybrid work models, and a transition to modern, flexible workspaces, he said.

“Business requirements have changed since Covid, but they are increasingly focused on securing high-quality, premium spaces despite a shift towards smaller footprints.

“So there is some movement, with tenant retention at 79.45%, but also a stabilising trend in rent retention with tenants willing to higher rents, up 7%, to secure premium locations.”

Tenants were also signing up to longer-term leases as they refined their office requirements, and many landlords were supporting that with incentives to encourage tenant loyalty, he said.

“Overall, commercial property is more dynamic these days, and it is no longer possible to simply advertise a space for rent.

“Landlords need to understand tenant requirements, and respond to them, and if they do they will secure good tenants, and rent.”

Meanwhile, commercial real estate firm JLL has released its latest Vertical Vacancy Review, and that highlighted the ongoing shifts in the office market.

It showed Auckland's core CBD premium vacancy rate remained low at 2.2% in the third quarter, but the core CBE A-grade rate was at 16.7%.

In Wellington, the overall vacancy rate had increased to 5.9%, and was expected to increase further, while in Christchurch prime CBD vacancy rates held steady at 3.2%.

JLL head of research Chris Dibble said there was a clear divergence between prime and secondary office space.

Buildings that boasted strong sustainability credentials and flexible, high-quality spaces were emerging as the most sought-after, he said.

“This trend is reflected in widening disparities in occupancy rates and rental values across different asset classes.”

But development and refurbishment activity across Auckland, Wellington and Christchurch remained high, he said.

“Owners appreciate that attracting the best occupiers in a higher vacancy market means providing the best possible premises.”