Can they afford it?

The last 18 months have been particularly good for industrial landlords in Auckland.  Rents have increased significantly. Vacancy rates are lower than we have seen for many years. Landlords can pick and choose from tenants.

It’s reflective of the cycle which over the last 30 years has seen rents move down and up, and also remain stagnant at  times. There have been times when tenants held the dominant hand, and irrespective of what was written in a lease, could negotiate to their advantage. And there are times , such as the present, where landlords are able to increase rentals significantly, because tenants have fewer choices. And properties are unlikely to be vacant for long.

But as rentals for sitting tenants increase significantly, there are concerns. Obviously there exists the potential for massive rental increases, where landlords have not kept up with the market, and for whatever reason their tenants are paying significantly under market. But many tenants who have actually been paying market rentals are still subject to not insignificant  increases.

What impact are these rental increases likely to have on business viability ?  We know from our experience that there are many smaller businesses that, depending on your definition, are marginally profitable. Business owners are often working long hours, taking the responsibility that comes with staff, debt and running a business, yet often taking home less than many of the bureaucrats at our council – who have little or no accountability and responsibility.

So the question arises – will tenants  be able to pay? With the minimum wage due to be hiked soon , and we don’t think this is necessarily a bad thing, and some large increases in rentals, will some of those businesses be viable enough to pay the increased rentals? Whilst often a major increase in costs is just the incentive businesses need to examine their productivity, and look at systemization and automation options, there are many businesses already at capacity.

The divide between rich and poor in the community generally is under increased examination. But there is also a divide in the business community that is not as apparent. Whilst the last few years have been positive ones for the majority in business, there are many that produce a return for the owner  less than would be expected from taking a job with a weekly paycheck. Whilst there is an argument that the cycle of commerce is such that poorly run businesses will fail and well managed ones succeed, there are also many , often smaller businesses that are constrained by their nature to being essentially service providers with a fixed income but variable costs.

And one of those variable costs can be rent. And although it is just one cost, it is a major one.

And if rents rise too much, too quickly, then do they have the potential to threaten viability of some of those small businesses ?

It is a question that, as a landlord, we need to be aware of, and take into consideration.