Read our article in The Chamber Magazine, eversion
While 2011 was a challenging year for the commercial real estate market in Cayman there were some positive signs.
New Class ‘A’ buildings at Camana Bay and Cricket Square are going to be completed this year, both of which have anchor and secondary tenants already signed up. In 2011 we also saw some life in the commercial sales market with the first signifi cant sale of a commercial building since 2008. Zephyr House sold for US$5.8M in June of 2011, the net yield was just under 10%.
IRG advised on the transaction. Piccadilly Centre also went to contract at the end of 2011. With current returns on major asset classes in North America and Europe declining below 5%, commercial property in Cayman can still offer an attractive risk adjusted return for local or international investors and we expect to see more sales in this sector this year.
Looking ahead to 2012 it appears that some of the same themes from last year are set to continue, namely, the Class ‘B’ market is suffering from a significant oversupply of space and rates are still declining. Average base rental rates in this class have now dropped below US$30 per sq ft per annum.
Although it is positive to see a new tower being built for Appleby’s and hearing that Walkers may move into their new building by the end of 2012 these two developments will mean additional space coming onto the Class ‘B’ market. Cayman Enterprise City have disclosed they will be leasing some space at Mirco Centre, Grand Pavilion and at the HSBC building on West Bay Rd., this is a positive development, but at this stage the amount of space being taken hardly makes a dent in the overall vacancy rate.
IRG have been advising Landlords of Class ‘B’ commercial space on how to deal with the challenging situation they fi nd themselves in. While the quickest and easiest route for Landlords is to drop rents quicker and to a greater degree than other buildings in the same class this has a dramatic long-term impact on the value of the building, as commercial real estate is valued on the income stream it produces.
This action can also cause issues with any existing tenants who will then also expect a rent reduction for their remaining term, for this reason dropping base rental rates for vacant space in a building in which the majority of the space is leased needs to be handled very carefully.
The most profi table approach for Landlords over the medium to long term is to work closely with tenants showing initial interest and to understand what allowances and incentives work best in any individual situation.
These can range from tenant improvement allowances for fi tting out the space to the tenants needs, free rent periods and many other creative incentives which can help to close the deal for a Landlord without discounting the base rental rate too drastically.
Another strategy that has proved to give Landlords a positive net return over twelve to thirty six months is to invest in specific upgrades and modernisations as well as providing targeted on site services. This approach needs to be tailored to the building and location and will be different in every case.
Although there is still quite a bit of apprehension in the market from Landlords and tenants we are hopeful that rents and vacancy rates will stabilise in 2012.
For more information contact
Ollie Collins at International Realty Group Ltd. (IRG) on 623.111 or email [email protected]
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