Published Thursday 6th September, 2007

Implications of new office buildings

The information provided in last week’s column is that Port-of-Spain will have to absorb 3.27m sq ft of new office space within the next two years. That is an increase in supply of about 50 per cent, given that the existing office stock is about 6.5m sq ft.

Please note that all the new office space is A Class ie prominently located signature office buildings with secured, covered parking, elevators, advanced security systems, high-quality construction and finishes.

The most obvious implication of this is that we could be looking at an oversupply of offices in our capital city. The details of that oversupply and its impact are the subject of this column.

But it is important to note that in uninformed property markets such as ours, where proper research is seldom carried out, perceptions and/or expectations can be overemphasised.

The oversupply contention has to be carefully examined since it is central to our understanding the capital’s future.

Some critics of that contention have said that all that is happening is that a new and dynamic segment of the market is opening up with the erection of these new buildings. It would indeed be an error to look only at the gross supply figures since markets really do comprise segments which interact in certain ways.

The oversupply contention is based on the fact that the largest occupier of space in the entire market is the State and its agencies.

We therefore need to consider what are the State’s intentions and commitments with respect to office space in Port-of-Spain.

Last week’s table listed 2.3m sq ft of new first-class office space being built for the State. But there is another aspect to the supply of new office space in our capital since the State has reportedly made commitments to certain private developers of new offices.

The largest of the new private office developments listed in last week’s column is in the Broadgate Place Project to be developed by Transcorp Credit Union at South Quay. The Prime Minister turned the sod for this project on April 9 this year and during his address, he stated that “...the Government is supporting the project through the granting (sic) of a head lease of all the office space in the building.”

This important statement can be accessed at http://www.opm.gov.tt/news/index.php?pid=2001&nid=sp070409-3.

Broadgate Place is to contain 341,000 sq ft of office space. Additionally, we have to consider unconfirmed reports that the State might have entered as yet unpublicised commitments to occupy a large portion of space listed in the “excluded proposals” in last week’s columns.

On April 5, 2006, the Downtown Owners’ and Merchants’ Association (Doma) hosted its quarterly breakfast meeting under the theme: Does construction equal development? Invited speakers were the Housing Minister Dr Keith Rowley and the executive chairman of Udecott, Calder Hart.

Perhaps the most significant statement made that morning was Dr Rowley’s declaration that the Government was building all these new offices since they had no intention of continuing to rent office space in the capital. It seems that that programme is now well advanced.

To take occupation of the new offices, the State will be vacating the spaces they are now renting, as per the minister’s declaration cited above.

Given the projects tabled in last week’s column, we can expect that our capital will have more than 9.6m sq ft of offices at the end of 2009. If the State proceeds with its plans, more than 2.6m sq ft of office space—which it now occupies—will be vacated in the next 27 months as their new buildings become available.

As a first consequence, some 40 per cent of the office space now existing in our capital will become available to rent in that short period.

An interesting aspect of this emphasis on the supply-side is the list of excluded proposals set out in last week’s column. Of course no one can say when, or even whether, these proposals could become projects.

Does anyone believe that rental levels for offices will remain the same until December 2010? Will they be lower? If so, how much lower? If not, why not?

We would also point out that lenders who have used existing downtown office property as security could be at risk of holding “impaired assets” if the rental values of those decline as a result of the new office buildings.

Ironically enough, some of those very lenders who would be exposed by those declines would have also been financing the new projects.

Next week, we examine the implications of probable declines in office rents and increasing construction costs on the players in the market: developers, lenders and occupiers.