Tremors and Tenants: Does earthquake proneness affect demand for office space?
||Filippova, Olga; Adam Curtis
||Tremors and Tenants: Does earthquake proneness affect demand for office space?
||21st Annual European Real Estate Society Conference in Bucharest, Romania
||According to Auckland office leasing agents, the effects of the Christchurch earthquakes have rippled to New Zealand’s largest office market. We conducted face-to-face semi-structured interviews with property professionals representing five large real estate firms to explore the impact that the Government’s earthquake prone building policy is having on the country’s office markets.Very clear themes emerged from the interviews including a distinct shift in focus from Green Stars (voluntary environmental rating scheme for commercial buildings in New Zealand) to Seismic Grades. The degree to which a building meets the current New Building Standard (NBS) is now the most important consideration for tenants looking for new space in the Auckland CBD. Driving this are factors such as a concern for the health and safety of employees and tenants’ exposure to OPEX increases associated with insurance premium hikes. The latter concern is being mitigated in part through a mix of gross leases and net leases that incorporate OPEX capping.It also emerged that it is now standard practice for landlords to provide tenants with Initial Evaluation Process (IEP) reports which indicate the building’s percentage NBS and Seismic Grade. Whereby some tenants simply do not consider buildings categorised as earthquake prone (below 34% of NBS). Those willing to negotiate with these building owners are insisting on clauses stipulating that the building be strengthened.Broad views of the market ascertained through the interviews include a general ‘flight to quality’, given that the newer, higher quality building stock tends to feature the highest Seismic Grades. This presents a dilemma to owners of older, earthquake prone buildings which tend to be lower quality. Many such owners find little financial reward for carrying out upgrades being restricted by rent increases irrespective of seismic issues.It remains to be seen whether the ‘spill over’ effect from the Christchurch earthquakes will continue to dominate the Auckland market, a place not usually known for earthquakes. Study participants indicate a notable increase in the tenants’ due diligence process. Due to this awareness, the agent’s role is changing. Whereby traditionally they act on behalf of landlords, to succeed they need to address the concerns of tenants as well.
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||E: International Real Estate
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