Cayman Real Estate specialist, Jeremy Hurst gives his opinion on the effect of the new Government Office Building on the Cayman Commercial Real Estate market......
1. Once the new government building is completed and government comes under one roof, there will be an abundance of commercial property for lease or rent on Grand Cayman. What’s that going to do to the commercial property industry?
The effect may not be as significant as most people are predicting. We are coming out of an office space market with a severe undersupply especially in the class A market sector. Office vacancy rates before the recession were under 2% with almost no class A space available. During 2008 and 2009 some new buildings were brought onto the market and during the same period most companies either contracted and or remained stable. Others were not able to get head office approvals to relocate to new premises. As such vacancy rates increased over the past two years to around 8%. Even though this is significantly higher than before, it is actually a normal rate for most international markets and far lower than most cities in the US for example as the table attached shows. Significantly, Class A space is still in very low supply with most vacancy being found in a limited number of the older class B buildings, especially those who have lost tenants to the new buildings. The result is that over the past two years rental rates for Class A office space have remained relatively stable. The same or slight rent decreases has applied to the better class B buildings with low vacancy rates. Landlords with higher than normal vacancy rates have however offered their space at significantly lower rates although typically only for the first year or two of the lease. These Landlords are offering additional incentives to attract tenants such as rent free periods or higher than normal fitout allowances, which is naturally preferable to leaving their space vacant. Some of this vacant space had started to be taken up and encouragingly we are starting to see a trickle of new companies relocating to and setting up office in Cayman, which, although nowhere near pre recession levels, is a significant increase over the past 18 months. 2010 therefore promises to be a year of gradual recovery in the office space market and vacancy rates will likely even fall slightly. The GOAP accommodation will not likely be ready for occupancy until late in 2010 and possibly not until 2011. By that time the office space market will have corrected itself slightly and vacancies will be lower than they are currently. Most of the tenants moving to the Government Building will be moving from class B+ buildings and so vacancy will increase to a greater degree in this sector. Class A rent rates should therefore remain relatively stable and could possibly even increase as new Class A buildings are prelet, especially bearing in mind that any new Class A building that breaks ground in 2010 will unlikely be ready until the second half of 2011 at the earliest. Class B office Landlords will however likely continue to offer attractive incentives to tenants especially those in properties with higher than normal vacancy rates. Assuming a relatively slow absorption of space over the the next two years, vacancy rates are unlikely to increase to levels that much out of line the average for global office markets, even though they have been higher than those we’ve experienced in the recent past.
2. How can businesses benefit?
The introduction of the space in the GOAP office building to the market will not cause the collapse of the local office market some predict and in fact may create some positive benefits. Naturally there will be some good deals on offer, especially to tenants looking to relocate to good quality Class B office space, which has been vacated. Tenants may be encouraged to move by a combination of attractive rates, landlord incentives and the fact that they will be able limit their cost of fitout by taking over offices already fitted and comparatively ready to move into. This could save them between US$150 and US$200 per sq.ft. compared to the cost of fitting out new shell space. Even so certain sectors of the market will still prefer to move to new Class A space and it is likely one or two new buildings will break ground during the latter part of 2010. Increased competition will however encourage Cayman landlords to improve the quality of their older buildings by upgrading their hurricane resiliency - installing back up generators or retrofitting with impact rated windows for example, or renovating common areas. Improvements such as these will generally enhance the quality of Cayman’s office stock and make our office space market even more attractive to corporations considering Cayman as a possible jurisdiction in which to set up their offices. Another, perhaps not so obvious benefit, to the business community and country, will be the economies of scale and cost savings that should be achievable by centralising many of Government’s departments under one roof. Lastly, the country as a whole should benefit in that the new GOAP Building is being built to Hurricane Shelter standard, which will mean Government can remain fully operational in the event of a serious storm.
Contact Jeremy Hurst on 345 525 9900 or