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No recovery yet for commercial real estate market

Published: 
Thursday, November 30, 2017
Experts warn…

Although it would appear that the local real estate industry was on an accelerated disruption curve over the last couple years, experts have warned that it may not improve any time soon as underscored by rapid changes in tenant dynamics, customer demographic shifts and the ever-increasing demand for improved service delivery and amenities.

Real estate developer and businessman, Joseph Rahael confirmed, “There has certainly been a general reduction in the demand for all rental spaces in the warehousing sector, the office sector and the retail sector.”

He added, “That has been existing now for the past couple of years and has not improved recently.”

Pressed to say if the situation might improve anytime soon, Rahael who heads Amera Caribbean Ltd replied, “It would depend on the economy. If it rebounds and if there is an uptick in economic and commercial activity, then clearly the demand for rental spaces in all categories will improve.”

He continued, “Eventually, you will see the demand start catching up to the supply on the market and you will start seeing a greater absorption of space in the market-place. One usually follows the other.”

Formally defined as property that is used solely for business purposes and are leased out to provide a workspace rather than a living space, commercial real estate can range from a single gas station to a huge shopping centre, and extends to include retailers wanting to operate offices, hotels, strip malls, restaurants, convenience stores and boutiques.

Rahael said while there were various reasons for businesses having closed their doors in the recent past, he stressed that not all closures were related to the current economic downturn.

Focusing on the impact the state of the economy has had on the business community, Rahael said, “As a result, businesses are experiencing lower sales and reduced economic and commercial activity. It’s a situation where sales are down and profits are down, and that is obviously impacting on a business’s ability to pay rent, pay staff and generally conduct business. “

He added, “There is an impact on the economy and businesses across the board, and it’s no secret, it is well known to everyone.”

In the “office” sector, Rahael said, “The office rental market has been very soft on the demand side for quite some time. There has been very little, if any, new demand for office space so you would find anyone who has space available for rent would have a tough time in getting that space rented at the moment. This is because the demand is so low.”

He said there was no evidence to suggest an over-abundant supply of office space although new buildings had been constructed—mainly by private individuals—for this purpose.

Rahael added, “But the lack of demand coupled with the supply on the market has created a gap in the equilibrium and therefore, there are some empty spaces.”

He said people would continue to see the For Rent signs for quite a while as this availability was not being absorbed as quickly as it previously might have been.

On the retail side, Rahael said, “This sector is usually more resilient to economic downturn than the office market and that’s because in the retail environment, it’s a combination of mom-and-pop stores and national chains.”

He said national chains are equipped to better withstand an economic decline as opposed to the mom-and-pop outfits as they, “Try and ride out the economic downturn for as long as possible as they won’t necessarily give up their place as it is likely that long-term leases are in place.”

He said this is similar to the mom-and-pop operations, as they too would rally to hold on as long as possible.

Rahael revealed, “In the retail sector, although business is down as a result of the economic downturn, there has been less fall-out here compared to the office sector.”

“However, that’s not to say there hasn’t been any fall-out in the retail sector because, in fact, there has been some, and that is as a result of some tenants having no choice but to close down.”

He said one of the main issues which remained a major set-back for many businesses was the lack of foreign exchange, which had led to the premature closure of several operations.

Rahael said some closures were not directly linked to the economic decline as some businesses closed for other reasons such as changing consumer patterns, career mobility, demographics and because it had proven to be an unsuccessful business model.

For those now entering the market through the provision of new commercial rental space, Rahael was cautiously optimistic as he said, “You are still getting some absorption but it is not as quickly as it used to be.

Before, if someone was building a small strip-centre or a new mall, that would have been rented within a six- to eight-month period. Now, it might take a year and a half or so, to get it fully rented.”
Asked to offer suggestions on growing the sector, Rahael said investors and developers needed to be mindful of the type of property they wanted to build or buy moving forward.

He explained, “In an economy where the tenant demand is shrinking, you have to be very careful about the amount and type of space you put into the market.”

Rahael cautioned potential investors, “Be wary of the time-frame associated with how long your development might remain vacant until it is rented.”

He urged individuals to be mindful of all the factors involved before building or buying a property.

To landlords, he said, “You have to look for creative ways to be get your premises rented, whether offering tenants an extra month or two rent-free so they can do outfitting, or offer tenants enticements to come into the space.”

Unable to provide official statistics, Rahael said, “Landlords may prefer to lower the rent of an existing tenant rather than lose that tenant and not be able to rent the space.”

He said landlords would have accessed loans in order to develop the commercial space and that it was not always simple or feasible to reduce the rental income as they, too, had financial obligations to honour.

HCL softens rental arrangements

Confirming the negative impact the economic decline had left on larger property developers, chief executive officer, HCL Group of Companies, Richard Le Blanc said, “It’s obvious T&T is in a recession.”

Refusing to sugar-coat its effect, Le Blanc admitted, “I would agree over the last year or two, we have actually seen a rise in vacancies that were not expected and are, in fact, out of the norm.”

However, Le Blanc said they could not afford to ignore the fact that more commercial properties had been built over the last couple of years.

“Yes, there is an economic downturn but we can’t underscore the fact that in Port-of-Spain, new office buildings have been erected along with new shopping malls in San Fernando, Arima and Maraval too.”

Le Blanc said along with the economic downturn supply was also increasing.

He, too, advised people to look at the picture in a holistic manner because there were solutions to keep the industry alive.

He claimed, “To sit down and just merely place the vacancy rate squarely on the shoulders of recession, I think it might be a little bit unfair as there are also other factors at play.”

In addition to One Plaza located at One Woodbrook Place, St James, HCL owns and operates two of the country’s largest and most popular malls: Long Circular Mall and Trincity Mall.

Asked to recommend possible strategies on how to help the sector grow, Le Blanc said, “Some of the key strategies to help the sector grow would involve the undertaking of modern approaches to the development of commercial space.”

He defined modern approaches as those referred to the principles enshrined in the concept of sustained development, as he cited office buildings being developed along ‘green lines.’

“The benefits of adopting such a modern development programme will allow for profitable growth for the developer, while at the same time improving the quality of life and service to the user.”

Le Blanc said employees, retailers and shoppers would all benefit from such a move.

He argued that the impact of technological advancements was also affecting the industry.

“In addition, technology has also impacted the property industry as it has done so many other industries. We have seen the increase in online shopping affect brick-and-mortar shops negatively. Office space is no longer the traditional office buildings we are accustomed to as technology has allowed for initiatives such as hot-desking and work-at-home-employees.”

Pointing to the pioneering moves abroad in which cars were becoming driver-less, Le Blanc urged individuals to be mindful of the role technology had assumed.

He declared, “T&T continues to be in a state of flux. Obviously we are going through some level of structural change but, at the end of the day, we still operate in a free market system so going forward, if the demand is falling and the supply is increasing, then it stands to reason that rental prices ought to fall to reflect these changes.”

Le Blanc posited, “I would think that once the time-lag has passed, that rental rates may very well fall.”

He said as landlords, they always had to evaluate why there is a failure with regards to an unsuccessful tenant.

Le Blanc surmised that some tenants may be experiencing difficulties not remotely linked to the economic downturn, which made it doubly important for them to ensure proper assessments were carried out in respect of each situation that occurred.

“Any incentive we may offer at this juncture if they are in that position, will not make a difference so it is not a simple and clear-cut case of merely giving incentives during these times.”

However, he emphasised, “We are cognizant that there is an economic downturn, there is greater supply on the market and therefore, our actions are a little bit softer than it used to be in the past.”

Le Blanc said “softer” encompassed rental rates and the outfitting periods offered to tenants.

Le Blanc said there was one defining characteristic which had set real estate apart from other industries, “Usually, when people are involved in a real estate transaction, they are locked into a lease and it would last a specific numbers of years.

“So there is a time-lag between renewing the lease and what goes on between. Also, you can start a project in a down period and, by the time you are done, we have entered another up period as some takes years to complete.”

Regarding the concessions HCL has introduced to help their tenants navigate this trying time, Le Blanc said while people were always happy to receive the benefits, “we continue to monitor the situation and look at what is happening in T&T, and we will act accordingly.”

Reflecting on his own position as a real estate executive, Le Blanc suggested an approach which he felt most appropriate given the present circumstances.

He said: “We have to be a lot tighter in terms of how we spend money, what we spend money on and that has to be combined with a more accommodating approach towards our customers. We have to look at our customers and their business models and sometimes as landlords, we actually have to go out and help our customers make a success of business because once they are successful, we become successful as landlords.”

Banking sector confirms sector is static

Echoing similar sentiments as Rahael and Le Blanc, a senior banking official said, “On the basis of what I am seeing in our sector, at best it is static but definitely on the decline both in terms of occupancy and rates.”

Pressed to say what trends they had observed in the last two years, “The commercial sector as described by the Central Bank has been in decline for the past two years and based on initial numbers will continue in 2017.”

Asked about the possible causes for the slow down, he explained, “Government, who was one of the main commercial users is currently rationalising its rental programme and consolidating such as the Government Campus, which means there is now an overstock of both commercial and housing for rent stock as a result of the significant decline in foreign direct investment and the sluggish economic prevailing conditions.”

Weighing in on what steps could be taken to stimulate the market, the banking expert suggested, “For one, pricing per square foot will have to come down as you will not be able to get the rates as previously existed in the market.”

He stressed, “The pricing will have to change, perhaps to one flat rate instead of rent and facilities and more lease-to-own type arrangements and longer tenors to be more cost effective.”

AREA urges landlords to be ‘fair and flexible’

According to the Association of Real Estate Agents (AREA), “The commercial rental market is currently very quiet with various types of inventory available and unrented for between 12 and 18 months.”

Officials said this included both older properties that have been vacated within the last 18 months, as well as new buildings that may have been completed during the economic downturn where tenants are asked to pay higher prices.

Regarding the economic outlook for T&T, AREA said: “We have seen businesses downsizing or rethinking any type of expansion or relocation plans in efforts to save money and weather the slow down in business activity in their various sectors.”

They reasoned, “The acquisition and occupying of new space or premises carries costs which can sometimes be substantial and prudent business practice has seen a hold on any capital expenditure from businesses as they navigate the way forward as the local economy transitions through to the new normal set by lowered oil prices and reduced government spending.”

Like the banking sector, AREA urged property owners/developers to consider reducing rental rates being implemented.

They said, “While property owners need to rent their commercial space to generate the returns on their real estate investment, most need to now reconsider the price per square foot they are asking for their space.”

“With high inventory and limited interest, lower rates would potentially attract businesses looking for quality space at more affordable rates.”

They warned, “Owners that chose to hold out for their asking price may lose multiple opportunities of maybe as much as 90 per cent of the asking rental price income when not willing to negotiate.

“A discounted rent could equate to less than one month rent but the owner could lose many months of rent while waiting on their asking price. Basically, owners need to be flexible at this time.”

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