As vacancy rates and incentives continue to rise and rents fall, tenants are in the driving seat - and that's here to stay.
The new commercial real estate trends benefitting tenants are all being driven by the abundance of sublease stock. The amount of sublease space available in Sydney and Melbourne has surged and will continue to do so until at least 2023.
Many of our client-companies are still waiting for the dust to settle before making any permanent decisions on how much space they'll give up, so there's more to come. Despite this, here's what we're already seeing:
Co-working is an incredible offering for small business. But larger offices with 30+ staff won't be able to justify the extra cost of co-working. The problem is, the large CBD co-working operators have leased 5,000-10,000sqm at a time, forecasting big-business take up.
Subleasing spaces are generally offered as fitted and furnished (the main cost impediments to relocating), just like co-working. Co-working also offers other service-based cost savings, but we don't think it justifies the cost (for big business).
Subleasing brings with it a business opportunity – to upsize, downsize or upgrade your fit-out. And we're seeing more and more companies considering it as sublessors (the companies giving up their extra space) have written off the cost of their rent and using it as a strategy to recover costs.
So, how are Landlords lease terms competing?
Landlords are changing the physical building offering to respond to tenants wanting to reduce space requirements and save money by taking advantage of flex spaces. These days, tenants seek a mix of core leased space and landlord-provided flex spaces (e.g. informal and formal meeting rooms, board rooms, etc.), which can be scaled up and down as required.
New assets coming online in Melbourne, such as 80 Collins Street South and 130 Lonsdale Street, are an early indicator of this commercial real estate trend, with all new stock including flexible space solutions.
And, in a competitive market with low-interest rates, we expect more landlords to follow suit, upgrading their premises to include shared facilities and other value-adds to compete for quality tenants. And tenants love it!
Usually, landlords would use impending deadlines to pressure tenants into exercising options or signing new leases. But, post-COVID, landlords need the cash flow. So, if there is a delay between new premises, we're finding most landlords are more than happy to go month-to-month until the tenant settles into their new space.
Let's be honest. If you have to move home, you're probably ready!
Nonetheless, a common mistake is not leaving enough time to explore suitable market alternatives or find comparable market options to leverage in your negotiations.
Of course, we always advise our clients to start preparing as early as possible. But the good news is that post-COVID, timing slip-ups are less catastrophic for tenants who plan to relocate in the current market. What's more, if lease terms are cheap and flexible, it's generally easier to make a quick decision.
We'll all be back in offices, to some extent. It is necessary on so many levels; for our productivity, collaboration, and (let's face it) our sanity.
So, the talk of the town seems to have shifted to exactly how much space tenants will need post-COVID. But what about the efficiency of this space?
There are elements we are helping clients think about that we never had to before – think social distancing, transport options and staff proximity to the office (given the gentrification of regional towns).
It is true: post-COVID, businesses generally need less space—about 20% less in fact.
On average, the efficiency gained through leaner workforces and working from home arrangements has reduced space requirements by 60%. But this is also offset by other factors (such as growth planning and social distancing requirements), which can increase a business's space requirements by up to 40%.
So, it's not just how many staff you have that determines how much space you need. It's also about how much you want your team to collaborate and attend the office. As well as how much your office contributes to your company culture.
For this reason, workplace planning will be more sought out than ever. If this is something that you have not yet considered, have a read here Space Planning and Workspace Design.
In 2021, commercial tenants are more confident in their position, and the results are showing. We're achieving things in 2021 that even Tenant CS wouldn't have been game to try at the beginning of 2020!
Landlords, recognising that the tides have turned, are more amiable than they have been in a long time - dropping face rents, increasing incentives and offering flexibility of lease length.
Tenant CS is here to assist businesses through these lease changes. Get in touch today to see how we can help you!
Going into a lease negotiation? In a post-COVID market, here's what we want tenants to know.
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