Crisis and Opportunity
A myth has developed in the business public speaking circuit that suggests that the chinese symbol for crisis is also used to denote opportunity. In my research to source this I found that wikipedia claims it is actually not true and they describe it as fanciful folk etymology. Anyway it is a good story and it lead me to a quote by Andy Grove, founder of Intel and author of ‘Only the Paranoid Survive’ which I find insightful. He said: “Bad companies are destroyed by crisis, good companies survive and great companies are improved by them”.
If we wanted to see an upside to a recession then surely this is one. In his biography titled Andy Grove: The Life and Times of an American, Harvard Professor Richard Tedlow tells the story of the challenge faced by Intel when the japanese overtook them in the production of cheaper memory chips. This was a product line that Intel had been very successful in and a large part of the legacy and their identity. So Andy Grove said: “If the board should kick us out and bring in new management, what do you think the new management would do?” And his colleague answers immediately, “Get us out of memories.” Andy then says, “Why don’t we walk through the revolving doors, come back in, and do it ourselves?”
By dramatically changing the direction of Intel Andy Grove is credited with saving Intel. Professor Richard Tedlow then goes onto to contrast the american car industry which is suffering from not leaving the legacy and constructing more of the same. He claims that if you look at crisis without legacy you do so without emotion making reality easier to see and major decisions easier to make.
So where to for our industry in general and my commercial real estate business in particular? Well the advice is to not remain attached to where we have been to see the current reality of the regulatory environment and the current economy and be prepared to go forward with radical and wide-ranging changes.
Looking for Office Space leads to clarity about your business
It is always interesting to me what people say about their business when they view alternate office spaces. Clarity is defined as the quality of being certain or definite and in this context I mean they determine how their premises serves them and adds to the performance of their business.
Recently I have advertised office space at just $165 per m2 and spoke to a number of business owners. I concluded that in times of ‘recession’ as we are now, a valid objective for any firm is simply to survive. A downturn always brings an increase in bad debts, late payments and often greater marketing and advertising costs to chase fewer sales. So in an effort to control what is usually the second highest overhead after salaries is understandable by finding space at more affordable rents.
More qualitative considerations would include determining whether your premises serves you might be:
1. Location – does the area work for you and your staff, is it handy to facilities like gyms, lunch and parking. What about your clients, what does your location and building say about your company? Does it support the image you wish to project to your clients?
2. The space itself – is it big enough or too big. The configuration – is it laid out and efficiently support your numbers and meeting and storage requirements. Does the building have adequate IT infrastructure?
3. Term, how long a lease do you need? Will the building continue to serve you in 5 years?
4. A place to create? A largely intangible point but one where you knows whether it works or not.
One thing about working in a recession is you soon get to find what works in tough times. One message that keeps coming through is the need for flexibility, change, creating new ways of doing things like virtual software. Farmers Department stores are today celebrating their 100th birthday. They credit their survival on adaptation. And so what are the components of comfortable office space which enable staff to create, adequate natural light and heating, meeting space, quiet space, a vibrant location?
Clarity about your business will certainly help you ride through this recession. So find office space that serves you. Happy hunting and let me know if I can help!
October 2009
Planning our suburbs…for everyone
The latest Wellington City Council initiative invites public consultation on proposed changes to the District Plan which will shape the look of our city for the next 10 years.
The major issue the city planners must address over the next 10-20 year period is where will the an estimated increase in population actually live. Most of us would prefer not to trek north to the only substantial available green fields housing sites being north of Upper Hutt and so that means that most of the 10,000 new citizens (over the next 20 years) will wish to be housed in the CBD or suburbs from Miramar to Johnsonville. I am rather going from memory with that number (and am entirely open to correction by someone) and I am surprised that the councils own brief does not mention this because I think it places the need for the need for changes to the District Plan in greater context.
According to council planners I have spoken to this rather modest population expansion (compared to Auckland’s population growth over recent years) will require an additional 8,000 housing units because it is expected that the average household size will fall to about 1.2 people per unit. Given Wellington’s limiting geography the answer to this question is clearly up. Living in greater density is going to be necessary in both the city itself and surrounding suburbs.
I am sympathetic to those who place great import on heritage and conservation values and can openly agree that numerous recent attempts at apartment blocks and infill and multi-unit housing have resulted in some ugly eyesores. The reality is that conserving this city’s older wooden villas which I find attractive and charming (and also dreadfully inefficient in energy terms) has made living in the inner city elitist as witnessed by the phenomenal growth of older houses in the inner suburbs like Thorndon and Newtown. Entry level in Newtown is now $500,000 which is certainly beyond the capacities of most first home buyers and so where will working people and newer immigrants ever hope to purchase their slice of the kiwi pavlova paradise? I don’t mind gentrification in itself, Ponsonby is charming and Newtown has been going the same way but does it suit everyone and serve the city long term?
I know I am being contentious and mischievous when I say the answer is clearly better high-density solutions. The vitality and vibrancy of the city comes from a mix of rich and poor, young and old. And if that means we have to share public gardens like they do in some of the big cities of the world like London and live in some relatively ugly tower blocks then that’s how the cities developers and planners will create 8,000 housing units. I think we have to be less precious about our older housing stock particularly around Thorndon. Avoiding change when change is required is not an option!
We have had a taste of life with high petrol process this winter. and surely you agree that the not too distant future will bring $3-4 per litre. Not all the population will be able to afford to travel to the outer suburbs and so our planners must embrace a future which provides for a wide diversity of incomes and preferences. So heritage and charming versus vitality and affordability?
So remember to have your say and download the Draft Plan Changes at:
http://www.wellington.govt.nz/haveyoursay/publicinput/pdfs/2008-12-residentsuburb/residentsuburb-brochure.pdf
CBDreality July 2007
CBDrealty reply to Sir Robert Jones’ claim in the DomPost that Green buildings are an inanity, likely to be a fashionable fad. We contend that the world has changed and the green imperative is now mainstream and that pressure on this accelerator is unlikely to change anytime soon.
CBDreality June ‘07
Rents in the city fringe, Courtenay Place and Thorndon are rising too making escaping from rocketing rentals more difficult, $550 per m2 for prime stock has been achieved and $600 per m2 is being asked for space becoming available in 2008.
A Whole New Mind
Book Review- Did you know the Information Age had ended? Dan Pink identifies a number of societal shifts which explains why the business environment in particular has changed so much and why old solutions just will not work into the future. Pink does provide a solution for the future which requires ‘A Whole New Mind’ namely the way we think and behave for a new time which is upon us called the Conceptual Age.
CBDreality October ‘06
Small tenants in the Wellington CBD office market have never had it so bad claims Brendan Clegg. Rentals are rising, very few options to choose from and no relief on the horizon.
Unit Title Market – Wellington
Commentary on the Unit Title Office market of the CBD of Wellington, how much space is actually unit titled and how much you can expect to pay for it.
Leasing Agents given new duty of care
A recent presentation by Wellington City Council officers on changes to the Building Act and particularly how is relates to earthquake prone buildings gave commercial real estate agents a better understanding of possible impact on the property market.
Sales agents involved in the sale and purchase of commercial buildings are aware that tightening earthquake regulations will have a significant impact on the market value and saleability of commercial buildings judged to be ‘earthquake prone’. The new code (NZS 1170) arising from the Building Act 2004 sets a requirement for rigidity roughly 3 times that of the 1965 code. Therefore older buildings upgraded or refurbished relative to the earlier code may no longer comply. Older buildings requiring building consents must now meet a threshold of one third of the new standard NZS 1170 for earthquake strengthening if they intend to maintain their existing use. For a change of use an upgrade to 100% of the new code will be required. The most obvious target will be older commercial or industrial buildings to be converted to residential.
But fear not, this new standard cannot and will not be imposed immediately. Council officers claim that their desktop study of some 4000 buildings in Wellington City will take up to 3 years and the designated buildings will have 5-15 years to comply depending on a number of criteria, including the number of people likely to occupy the particular building and surrounds. The officers suggested that buildings constructed after 1976 were unlikely to be affected by the changes and however owners and purchasers of older buildings could check any new designations on PIM and LIM reports.
Council officers will however be able to effect upgrades and strengthening with the implementation of a new policy which will block future building consents in ‘earthquake prone’ buildings once the cumulative values of those consents exceeds one third of the rating value of that building. The writer believes that leasing agents need to be very mindful of this policy because potentially tenants at some point in the future could enter into leases for parts of a larger building and become unable to carry out new fitouts and the like without the cooperation of their landlords who will have to undertake substantial (read expensive and disruptive to tenants) earthquake strengthening of the entire building. This would mean tenants would be unable to occupy spaces they have leased and litigation and general unpleasantness may ensue.
Some property owners are predictably unimpressed with the imposition of more regulation and cost. Local developer and commercial property owner Richard Burrell of Building Solutions however remains unsympathetic. His view is that nearly all commercial owners in Wellington have enjoyed substantial capital growth in recent years and he can use this value to fund the earthquake strengthening and works. He says to proceed with any work at all, building consents require documentation from engineers commenting on items like paraplegic access, building structure and fire safety compliances, it is really just pragmatic to proceed with upgrade works otherwise it will make more difficult for the buyer when it comes time to sell on the building.
Brendan Clegg
August 2006.
Where are office rents going?
Most tenants we meet are surprised to find office rents are continuing to rise in Wellington (13.9% for 2005 ). They point to confidence indexes in particular and reason that surely the office market is softening in response.
The writer has decide to investigate the most widely recognised index being produced monthly by the National Bank and accessed easily from their website. The current index is -31 (July ’06) and is trending upward from Nov ’05 when it was -66. For the construction of this index the National Bank ask respondents to predict ‘General Business conditions’ in 12 months time and provide a choice of 3 answers to reply. The aggregate index is the number of replies for “improvement” less those replies for “deteriorate”. But does not register those who answer “no change”. If 10% or 90% of respondents tick “no change” then the survey will provide the same measure but surely it suggests very different economic conditions?
Returning to the subject of office market rentals and whether economic indicators will substantively affect demand and supply our current view is that rentals will continue to rise for some years yet. Firstly at the macroeconomic level GDP is flattening with a prediction of just 1.5% growth. We must however look at this on a more regional basis. We know that government consumption is expected to increase 5.6% and we know that further increases are locked into budgets for some years to come. Getting exact data on the proportion of this expenditure destined for the Capital is not easily available but it is not unreasonable to assume that government departments and ministries will not shrink in the process of distributing and managing these government monies. Vacancies are still very low, the cbdrealty.co.nz Availability study reported only 3.4% (Oct ’05) and so we see the office towers extending along The Terrace to Thorndon being full for some time yet…
A significant factor in recent years is the rising cost of providing office space to tenants and in particular the compliance costs of operating the buildings and the construction of office fitouts. The latter according to the non-residential building cost index rose 4.5% and Rider Hunt predict this to continue. Compliance and documentation costs have escalated considerably as councils comply with the new codes (Building Act, 2004). Each building consent requires qualified reports covering paraplegic access, earthquake strengthening and fire safety compliance which explains at least 15% of the increase in costs and much up to double for very small jobs like the construction of just 2 offices according to Paul Lamb of CPCD. We see that landlords will pass these costs onto tenants either directly as rentals or indirectly as operating expenses.
The last point we would like to make is that we have observed the market to be inelastic to changes in rental. A landmark survey of the London office market from 1974-1995 showed that most firms choose not to move to another location in response to changes in office rents. We can only anecdotally suggest that this behaviour also applies to Wellington as we have not observed a migration of tenants to city fringe locations in response to rental increases over the last 2 years. Office markets have their own rhythms and we will see that office rents will adjust to general economic indicators very slowly if at all.
Brendan Clegg
August 2006
CBRE (2006), MarketView, Wellington Office, Retail, Industrial
National Bank of New Zealand (2006), Business Outlook July 2006, http://nbnz.co.nz/economics/outlook/060726/default.htm
Bank of New Zealand (2006), BNZ Weekly Review 10 August 2006, http://bnz.co.nz/binaries/w100806.pdf
Rider Hunt (2006), Rider Hunt Forecast 42
Hendershott,P.H., Lizieri,C.M., Matysiak, G.A., (1996) The operation of the London office market:model estimation and simulation. The Cutting Edge 1996. RICS Research, London