For office Landlords, the punches keep rolling in. In a continued trend from 2021, the savings opportunities for commercial tenants only improved in 2022. It's a tenant's market, and the best is yet to come.
The same can’t be said for industrial tenants. However, we believe the industrial bubble is about to burst, and a rebalance is on the horizon.
Here are five ways 2023 will feature better deals for tenants:
A speculative fit-out (a.k.a 'spec fit-out') is a new fit-out designed to accommodate a range of prospective tenants and give the advertised property an edge over the competition. It's paid for by the Landlord and built before any tenant commits.
Over the past few years, spec fit-outs have been increasingly rolled out as they allow tenants to move in quickly (reducing rent downtime for landlords). The selling point for tenants is the mitigated risk in construction cost and supply chain. However, they require a high level of compromise (or customisation) as they're not purpose-built to a tenant's business requirements.
Historically, the spec fit-out has been the lease incentive provided. However, with vacancy rates on the rise and with Landlords competing against cheaper sublease space that's also turnkey, we're seeing more and more of these fitted-out tenancies sitting empty for an extended period.
In Sydney, this has led to 5-10% incentives being added on top of spec fit-outs. Melbourne has been slow to the game, but incentives of up to 15% on top of the spec fit out are emerging.
The longer spec suites sit vacant, the more motivated Landlords will become. And that’s where the good deals lie.
The ‘flight to quality’ trend has gained momentum over the past few years as high-quality space becomes more affordable. This will only accelerate as WFH goes from fad to norm and tenants reimagine office space to attract and retain talent, settle into their hybrid working models and encourage a return to the office.
Amongst increasing vacancy, which provides more choices for tenants, lower-grade assets (including heritage buildings) which do not yet meet new technological, health/hygiene, service or environmental requirements will become increasingly redundant.
New tenants to these buildings can be the catalyst for upgrades, and existing tenants can upgrade, renovate, improve and optimise their premises at the Landlord’s expense. These landlords will know they need to put their hands in their pockets to secure or retain good tenants, so that’s where the opportunities lie.
Just like tech companies over-hired, FMCG companies have over-leased warehouses.
Over the past few years, a pandemic-driven surge in online spending and supply chain issues drove many retailers to invest in additional warehouse space to stock up on “just in case” inventory. As a result, Australia now has the world's lowest national industrial vacancy rate, with Sydney the tightest at just 0.3%.
However, with the economy slowing down and inflation rising, a recession is on the horizon. Consumers have started holding their wallets close to the vest, leaving retailers massively overstocked and scrambling to get their inventories under control.
A perfect storm is now brewing for a collapse in demand for warehouse space and, therefore, a reduction in industrial rents.
"We predict that a large amount of sub-lease space will hit the market next financial year, all of which will be heavily discounted", said Tim Green, Managing Director at Tenant CS.
"This will have a flow-on effect on direct stock. Competing with a distressed sub-leasing market, rents nationally should fall around 10-15% by 2024."
"Most REITs must be predicting this as they are cleverly insisting on long leases of 10-15 years to ensure as many leases as possible do not expire around 2024 when the correction is predicted to occur," stated Tim.
Let's face it. Working from home is here to stay.
"Work from home" has become the most popular search term on SEEK. And businesses have responded, with the number of job listings that include this term 11 times higher than they were pre-pandemic.
The average office occupancy rate as a percentage of pre-COVID levels for Sydney, Melbourne and Brisbane now hovers at 59%, 57% and 67%, respectively.
If they haven’t returned to the office yet, they probably never will. And that means businesses are paying millions for unused space.
The best deals being done are in sublet space. With incentives as high as 50-75%, companies with long lease tails, great fitouts and excess space have an appetite to recover costs at any expense.
During the pandemic, unprecedented actions were taken to prop up the Australian economy: interest rates plummeted, 'safe harbour' insolvency laws were written, the ATO stopped pursuing debts, and the Government committed billions of dollars towards stimulus packages.
As a result, there's been a reduced need to wind up failing businesses that have been artificially propped up.
However, the ATO has now started chasing debt - a total of $58.8 billion, of which 65% ($38.5 billion) is thought to be "collectable," i.e. likely to be paid. That means commercial landlords will likely see an increase in tenants defaulting on their leases due to financial hardship or formal insolvency, putting further pressure on vacancy rates.
Tenant CS doesn’t enjoy dancing on the graves of failing businesses. But these landlords will be lucky to see 10c in the $1 from administrators on what they’re owed. Great fit-outs will be left behind, and higher incentives will be provided by landlords to fill vacancies quickly.
Got a 2023 or 2024 lease expiry? Want someone to navigate you through the perfect storm for tenants?
Even a tenant’s market is hard to navigate alone. There's more than incentives and rent to negotiate, and tenants must weigh up all their options to get the best deal.
At Tenant CS, we execute commercial lease negotiation strategies for our clients – and our clients are always tenants, never landlords.
Don’t leave money on the table! Contact us to act on your behalf.