Why tenant representation is on the rise

For corporate occupiers, tenant representation enables them to secure the right-size premises at affordable rental prices and occupational costs.

David Green

Although Covid-19 has seen many companies opting for a hybrid model and reduction of space, the role of office property  is continuously changing to meet occupier needs.

“Corporate occupiers or office tenants are a lot more sophisticated than they were in say, 10 to 20 years ago. They rely heavily on their transactional advisors’ real estate insights, recommendations and market knowledge,” says David Green, CEO and founding shareholder of ProAfrica Property Services.

Green says that this advice is not only limited to deal terms and locations, but the transactional advisor also needs a strong knowledge of, for example, space planning and space utilisation, fire protection, strong knowledge of electrical and mechanical issues, and legal issues, energy efficiency benefits, service charge make up and calculation, office fit-out costs and fibre availability.

“The primary focus is often initially price comparison data and transaction negotiation to shortlisting of the preferred options impacted by all of the above. Such tasks require complex presentation of the rental and other charge impacts over the lease period, and are measured over various locations,” says Green.

Galetti Global Corporate Services broker, Alex Oberholzer, says that tenant representation has gained traction in the past five years, and the pandemic has had a significant positive impact on the service line. “Now, specific advice and market knowledge is needed to achieve the best possible outcome.”

Tenant representation is not just for office users. “Medium to large corporates in the industrial and retail sectors are using this service, and seek multiple smaller satellites sites to large freestanding headquarters,” says Oberholzer.

As tenant representatives, he says they aim to simplify complex occupational models into a single benefit outcome for the occupier. “This is really the benefit of engaging with a corporate advisor – to achieve a best-case scenario at the end of the day.”

Leasing and sales activity

Lately, some JSE-listed Real Estate Investment Trusts (REITS) have reported  an increase in vacancy rates in office space as a result of space consolidations and tenant failures.

Angus Alexander

Angus Alexander, partner at 121 Corporate Real Estate, says that Covid-19 has changed the way in which landlords and tenants view office space.

“Tenants are more flexible in the way they occupy space, and have realised it’s not difficult to move or reconfigure space within a short period. For example, during lockdown Level 5 in 2020, businesses adapted fast to working from home. Now these companies are looking at ways in which to improve the quality of the office space and comply with new health protocols to entice their employees back to the office.”

In an office market characterised by empty office buildings, landlords are competing to secure tenants and exploring new ways to attract and retain occupiers.

“As a result, landlords have seen the need to be competitive in their offerings. They can no longer rely on the disruption factor to achieve higher than market rentals, as it is a reality that almost any tenant can now relocate,” notes Alexander.

In order to attract and engage tenant representation brokers and potential occupiers, landlords believe in using the most important content marketing tools. These are virtual tours, building and space photography and accurate floor plans.

This is according to the 2021 VTS Global Office Landlord Report, which reveals that 73% of landlords agree that digital marketing tactics have become necessary to market available space post-Covid-19.

Nearly 60% of landlords say that tenants expect a virtual space tour before committing to an in-person tour.

Alexander says that despite a tough leasing environment, there are some pockets of excellence in space leasing where occupiers turn to tenant representation in prime nodes in Johannesburg.

Leasing activity has seen the likes of Anglo American, Anglo Gold Ashanti, Anglo Coal, SVA, Gibb (fit-out underway and occupation imminent) and Life Healthcare, Metier and Arup having moved to Rosebank.

In Waterfall City, Midrand, new leases have been concluded for Continuity SA, with Boehringer Ingelheim already in occupation, and Ericson Wood Décor and Modern still to move, as well as various organisations moving to Sandton prime offices.

Alexander points out that additionally, Waterfall City will soon welcome an international data centre company taking up 65,000 m2, set to use 80 mva of power.

Sales deals are also being concluded, especially for properties boasting long-term blue-chip lease agreements, says Oberholzer. Galetti recently sold a 4,200 m2 City Logistics site in Riverhorse Valley in Durban on the back of a 10-year lease to Boxwood Property Fund for an undisclosed amount.

Market trends

Sub-letting and early renewal are currently the two major areas for space demand. Oberholzer says that sub-letting in particular is impacting landlords negatively, in that the biggest competition is now the tenant in terms of attracting new tenants to buildings.

Alex Oberholzer

“The problem is that there is no nett uptake of space for the landlord, as the tenant simply reduces overheads.”

Another interesting trend is whereby a tenant commits to a minimum size with the ability to give additional space at a reasonable notice period. “For example, a tenant will sign up for 1,000 m2, with 750 m2 fixed and 250 m2 flexible”, according to Oberholzer.

“Irrespective of remaining lease periods, most tenants will attempt to renegotiate the lease agreement terms,” says Alexander.

Moreover, break clauses are being used or the threat of break clauses are being invoked to ‘force the landlord’s hand.’ A break clause refers to a provision for early lease cancellation by both the landlord and tenant.

Tenants are also downsizing by between 25% and 40% of original space, and in many cases, relocating to newer and green buildings. Many owner–occupier assets are being sold, and those occupiers rent space instead, according to Alexander.

Edited by Gudrun Kaiser

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