Attention tenants: deals are being done on CBD office rents
Landlords are being forced to rebate office rents by more than a quarter of their value in a bid to attract tenants as the CBD vacancy rate continues to rise.
Latest research shows conditions have shifted dramatically in favour of tenants, with competition between owners pushing incentives to levels not seen since the downturn of the early 1990s.
With the CBD office vacancy rate hitting 6.9 per cent at the end of last year, tenants have been demanding incentives of up to 28 per cent for prime-grade space and 30 per cent for B-grade space, according to Colliers International's 2013 Research and Forecast Report.
But industry operators say some "highly motivated" landlords have offered incentives as high as 35 per cent on long-term leases to fill gaps in their buildings, although the sources stress that these deals remain "outliers".
The report found CBD A-grade incentives averaged 26.1 per cent in the second half of 2012, up from 17 per cent in 2011. B-grade incentives rose from 19 to 26.7 per cent over the same period.
"The pendulum has well and truly swung in favour of tenants at the moment," said Andrew Tracey, national director of office leasing for Colliers International.
Landlords were offering big incentives to make it "compelling" for businesses to move when they were focused on economic uncertainty and cost-cutting, he said.
The report found the CBD vacancy rate jumped to 6.9 per cent from 5.6 per cent over 2012. Meanwhile, leasing inquiries were at 60 per cent of the level recorded in the previous year.
"You can't fight the market. You can make the decision as a landlord that you want to sit it out for a little while, but at the end of the day, if they are good-quality tenants then it's better to have the income there. And it's pretty important from a valuation perspective," it said.
But Colliers International also believes that incentives may have "peaked", with demand likely to improve as several large and medium-scale leases begin to expire in 2014-15 and tenants begin to compete for space again.
"The [tenants] who do deals now will be able to lock into their cost base for 10 years. It's the second biggest cost after people and if you can lock [it] in with solid incentives at a low point in the marketplace, it makes a lot of sense," Mr Tracey said.
Stuart Colquhoun, Victorian head of leasing for Jones Lang LaSalle, said it was possible that incentives could peak at an average of 30 per cent by the end of the year but were likely to come down by early 2014.
Mr Colquhoun said incentives were still "predominantly" applied to fitout contributions and only a minority of deals involved rent-free periods.
"The incentive provides cheap financing for the tenant to fund the capital expense of the fitout," he said. "But it also allows the landlord to maintain the same face rents, which they just don't want to reduce."