All commercial tenants, who have entered into a new lease over the past couple of years, will agree that the office leasing market has changed dramatically… and certainly not in their favour.
Company directors, who are yet to renew their lease, during this current market, should ready themselves for a material increase in their office rent and decrease in their incentive package. Instead of a steady (and reasonably predictable) year-on-year increase in rent, as experienced for more than a decade, the majority of directors are receiving notices that the face rent to lease their current office is increasing anywhere from 15% up to 50%. The largest increase, we have seen, is from a landlord wanting to increase the rent for our client by 62%!
So why are rents increasing so dramatically?
Prior to 2017, there was a long tenant favourable market. Rents were reasonable and incentives were generous and tenants found it relatively easy to renew their lease or find an alternative premises.
However, since 2017, the entire office leasing market has flipped 180° to become a “landlord favourable market”. This change has caught many unwitting directors and financial officers off-guard in realising the extent of the material increases in rents as well as the material decreases in incentives. Directors are discovering, and some for the first time, the scale of this commercial and financial impact will have on their company as a result of leasing an office during a landlord favourable market.
Whilst there are various issues that affect rents and incentives, it is once they are all combined that we can see the impact on that most basic and fundamental economic metric, the movement and intersection of the commercial real estate leasing supply and demand curves.
As an example of one of the issues on the supply side, the Sydney Metro Project removed several buildings from the market. This in conjunction with the redevelopment of many buildings (Goldfields House, 50 Bridge Street, 60 Martin Place etc), have led to a large amount of leasing space being removed from the market.
As an example of one of the issues on the demand side, the general economy has been running along quite well. This steady growth combined with a positive business outlook and confidence has meant many companies are seeking additional space to meet both current growth needs and future growth expectations.
The result from the decreasing shift in the supply curve and the increasing shift in the demand curve is the change in their point of intersection. The intersection is why the latest Sydney CBD Office Vacancy Rate has fallen to 4.1% (not far from its all-time low of 3.7% with many commentators expecting the vacancy rate to fall near 3.0%) and the average rent, for an A grade building, breaking through the $1,000/m2 range.
Perfect market economics in motion… but a perfect storm for tenants.
So what should directors do?
If your office lease is set to expire within the next 18 months, then not only is it prudent that you speak with a tenant advisor… it’s imperative.
As leasing costs are one of the largest operating costs for any business, a tenant advisor has the market knowledge and experience to advise you on the best course of action for your business but also negotiate the very best commercial and financial terms for your next lease (be it to remain or relocate).
At the end of the day, it is about having a professional on your side to do all of the leg work (to save you time), provide you with a transparent and objective advice and reports (to assist you to make your decision) and obtain the very best commercial and financial terms (to save money for your business).
So how do you choose a tenant advisor?
Whilst most advisors provide generally a similar service, call around and see what services they provide and their fee. But do not decide on cost alone as some advisors will only assist you until you have signed a heads of agreement. Some will assist in putting you in touch with other service providers along the way and some will stay with you throughout the entire process. Always choose the latter so you will only ever have to deal with one point of contact.
Importantly, your tenant advisor must be cost-effective and provide you with a positive return on investment. Whilst your advisor will naturally charge a fee, your tenant advisor should be able to generate savings for you that far outweigh their fee. In other words, appointing a tenant advisor should provide you with an expert who has your best interests at heart and saves money for your company at the same time!
Andrew is a Senior Advisor with Niche Advisory.
Niche Advisory is part of The Niche Group of Companies which provides tenants with the complete and modular range commercial property services covering tenant advisory, design, fit out construction, make good negotiation, make good works and relocation.
