Five years ago marked the start of the ‘financial crisis’, two CDO funds run by Bear Stearns declared that they were halting redemptions. There has been a transformation that has taken place in the Cayman commercial property market over this period, it is prudent to take a moment and analyze what the changes have been, what have been the cause of these changes, how the market has adjusted and what the future of the market may look like.
Given that Caymans commercial market is dominated by offshore financial service providers, the damage has not been as bad as one may have feared. In 2007, total inventory of class A, B and C office space was approximately 1.5M square feet. Today we have approximately 2.6M square feet, with the market adding just over Two hundred thousand square feet per annum.
Total vacancy across the office space market has increased from about Sixty thousand sft, or 4% in 2007 to over Four hundred thousand sft, or 15% today. Therefore, the absorption rate over the period has been One hundred and Fifty thousand sft per annum.
Base rent rates of class A space have increased 20% over the period. Base rent rates class B space have declined 7.5%. Base rent rates class C space declined 25%.
CAUSE OF CHANGES
The two main causes of change are the increased quantity and quality of class A office space, which in turn has raised tenants expectations and secondly the economic effect of the ‘financial crisis’ on small and medium sized businesses.
The development with the biggest impact on the market over the past five years has been Camana Bay. The developer has added over three hundred thousand sft. of Class A office space to the market. This, in conjunction with the new Government administration building makes up nearly 50% of the additional office space inventory over the period.
The ‘financial crisis’ seems to have affected some sectors of the economy more than others. Large multinational financial and legal firms have thrived over the period, expanding their occupied space and in many cases willing to pay higher rental rates for better space. Conversely, small and medium financial services firms together with service business’ serving the local market have contracted the amount of space they previously occupied and have managed to negotiate rent reductions.
The additional inventory at Camana Bay with its high quality design, construction, infrastructure and management has raised the standard for class A office space in Cayman, with the effect that many buildings that previously were considered class A, can no longer be classified as such going by BOMA (Building Owners and Managers Association) standards.
The total sft of class A inventory is the same today as Five years ago meaning that many buildings which were classified as class A in 2007 now fall into the class B category. The main reason for this is that BOMA states, among other criteria, class A buildings have “above average rents”, many buildings, which were commanding above average rents Five years ago, are now leasing at average rents. The result of this being total class B inventory has increased by Seven hundred thousand sft or nearly 150%. This substantial increase in supply has put downward pressure on class B rents and vacancy over the period. The vacancy rate for class B space is now more than 20%. There has been a similar situation with class C inventory that has increased by 30% over the period.
While class A rents have increased every year for the past Five years and by a total of more than 20%, class B and C rents have decreased by 7.5% and 25% respectively over the period. Landlords of class B and C space are having to become more competitive not just on their base rent rates but also in regards to offering more concessions on fit out, installing back up generators and in many cases acquiring additional parking for tenants.
We are seeing Landlords in the class B & C markets become more flexible in regards to lease renewals. Even if the renewal clause states that the rent will be a minimum of what was previously being paid, Landlords have recognized that an exiting tenant has never been more valuable, and are making concessions on rent and providing additional facilities.
Both Camana Bay and Cricket Square have pre-leased more than 50% of their new buildings. We would expect both of these buildings to be fully leased by the end of the year meaning that the vacancy rate for class A space will decrease to under 2%. While there are two class A buildings projected to come onto the market over the next eighteen months we anticipate that rents in this sector will continue to climb 2-4% per annum.
Over the next Five years we do not anticipate the class B inventory to increase, it will more likely decrease as some buildings drop down to class C space, while others will be redeveloped or change their usage to residential. The absorption rate through the ‘financial crisis’ has remained strong and with class B rates approaching half of class A rates, we believe vacancy rates will decline and base rates will stabilize in the class B market.
International Realty Group Ltd. (IRG) is Cayman’s leading commercial property broker, specializing in the leasing, sale, acquisition and analysis of office, retail and general commercial space and on commercially zoned raw land for development. IRG also provides tenant and landlord representation services to a wide range of owners, investors and tenants, and provides strategic advice on asset and property management based upon our 20 years of experience in the commercial property market.
IRG has an unrivalled working knowledge of the Cayman commercial space market and can offer its clients access to the only 20-year historical office space database, invaluable for market analysis and feasibility studies and assisting in tenant and landlord negotiations. IRG develops customized office and retail leasing and sales programs for our clients’ properties and offers tenants and investors the widest available knowledge of the Cayman office space market.