Financial year 2020 – Understanding customers’ needs
The outbreak of the COVID-19 pandemic resulted in sudden and serious economic upheaval for many businesses. Life as we know it basically ground to a halt. Significant drops in sales and a lack of security going forward are now forcing companies to review their cost base. Given that rent tends to account for a large chunk of a company’s fixed costs, the property sector has found itself in a precarious position due to all the sudden changes too. Understanding tenants’ specific needs is key to success in this current climate.
The White Plaza office building is just a few minutes away from Basel SBB Train Station on foot. The building’s rounded façade facing Viaduktstrasse mirrors the design of the indoor market next door, creating a distinctive landmark.
Allreal bought this property designed by architect Richard Meier in a prime location back in 2009. The building has around 20,000 square metres of floor space. Allreal has two long-term anchor tenants in the building: transport and logistics company DSV Panalpina A/S and an international fashion chain.
“The merger between DSV and Panalpina in 2019 helped boost our market position with long-term effect”, says Brian Winther Almind, Executive Vice President, Group Property, at DSV Panalpina. The new company structure also inevitably involved some reshuffling. And this had a knock-on effect on the amount of space the company would need in Basel going forward.
Allreal keenly followed any changes involving Panalpina from the word go. “Generally speaking, we think it is important to communicate with our customers on a regular basis. This way, we can keep up with what’s going on with them. This approach allows us to step in to help as soon as possible and to come up with tailored solutions that benefit us all”, says Stefan Hecker. His work on portfolio management at Allreal makes him a point of contact for business customers renting space from Allreal. The Portfolio Management department works closely with the in-house technical building management and property management teams to ensure that customers have access to all the specialist knowledge they may need across all relevant areas. The Portfolio Management department also assesses individual properties and entire property portfolios, which Allreal acquires, optimises for yield and, depending on the objective and market situation, keeps or sells.
“Generally speaking, we think it is important to communicate with our customers on a regular basis.”
Allreal has developed a long-standing business relationship with Panalpina. On that basis, it made perfect sense to continue this fruitful partnership with the new logistics company on board. But new requirements and fundamental changes meant that the existing lease needed to be updated. It is by all means possible, and indeed in everyone’s interest in some situations, to amend leases accordingly when circumstances change. As a property company, however, Allreal’s main objective is to keep vacancies to a minimum.
“We would normally sit down with our customers to talk things through face to face”, says Hecker. But the outbreak of the COVID-19 pandemic put paid to that way of doing things in spring 2020. The relevant representatives of DSV were in Denmark and the lockdown prevented them from travelling to Switzerland. And so the negotiations had to go digital. Allreal’s Portfolio Manager remembers the situation being out of the ordinary for everyone. “It’s so much easier when you can sit down with someone in person and see their reactions to suggestions and points being raised”, says Hecker.
As a way of giving themselves as much leeway as possible, customers often want the assurance of an early withdrawal clause when signing a contract. However, this kind of withdrawal clause tends to come with financial implications. In return, tenants can sometimes benefit from rent-free periods at the start of a contract term. Contracts drawn up in this way guarantee clauses that are beneficial to both parties, yet also binding in the long term. This is the type of contract entered into with Panalpina.
Allreal sought to use the negotiations to work with the customer to come up with a solution that would be viable for both parties. One objective was to account for the fact that the customer now needed a different amount of space. And Allreal also wanted to rent out the space on the same terms while maintaining the good existing relationship with the customer.
During the first round of negotiations, both parties set out their positions. “The critical point that led us to a potential deal was the realisation that we would need to find a solution for the penalty fee charged for early termination of the contract”, says Hecker, outlining the internal discussions within the negotiation team at Allreal. The Portfolio Manager stays in regular contact with the CEO and the Head of Property during these kinds of negotiations to ensure that decisions can be made quickly and talks can proceed efficiently. He can also call on in-house experts in other teams (e.g. technical building management and implementation) as required.
Given that Allreal has the resources and expertise required to adapt spaces to changes to requirements with speed and ease thanks to its in-house projects and development division, the negotiation team offered the customer the option of ending the lease on some of the space early and updating the functionality and layout of the space that was still required so that it catered perfectly to the new requirements. The expertise of the in-house construction staff meant that it was not long before the customer could get a clear idea of the associated costs and the amount of time required to get the conversion work done. On the other side, the customer would need to sign a new lease and commit to a longer term.
“Under the new contract, we are renting business space that allows us to continue with our business operations to the best of our ability thanks to the speedy conversion work undertaken.”
It soon became clear that an agreement could be made on this basis and the breakthrough finally came after lengthy discussions. DSV Panalpina was willing to sign a new long-term lease albeit for only around 40% of the space covered previously. And the good news for the logistics company was that they wouldn’t have to pay a penalty fee. In return, Allreal secured rental income over the long term, with the rates for the space still being rented remaining unchanged and in line with the market rental value.
“It goes without saying that we would have ideally wanted DSV Panalpina to keep renting the entire space”, admits Stefan Hecker. But problem-solving is all part of doing business. By the time the negotiations had come to an end, Allreal had found the best possible solution given the circumstances. And Brian Winther Almind from DSV Panalpina is just as happy with the outcome: “Under the new contract, we are renting business space that is perfect for our requirements and allows us to continue with our business operations to the best of our ability thanks to the speedy conversion work undertaken.”