City landlords feel the heat

Office landlords are in damage control as tenants wrangle better leasing contracts in a market tipped to feel more pressure in the coming year.

This has led to lease incentives of more than 25-30 per cent in some new signings in an effort to keep occupancy levels high. The incentives can range from lease abatements to free fit-outs and non-penalty break clauses.

New offices becoming available and a limited range of large-scale tenants in Sydney and Melbourne have also increased the pressure on landlords, particularly those where a tenant has confirmed their departure.

There is also the move to downsize offices as companies take on activity-based working practices, which require less space than a traditional office as more staff work offsite.

Some of the more prominent moves include lawyers Herbert Smith Freehills which has switched from the MLC Centre in Sydney's Martin Place to new headquarters at 161 Castlereagh Street, known as Liberty Place.

The co-owners of MLC, GPT Group and Queensland Investment Corporation, are undertaking renovations of the space and are speaking with a range of potential tenants.

Macquarie Bank is to relinquish its space at 1 Martin Place in the medium term, although some floors will be taken up by Charter Hall Group, as it in turn redevelops 333 George Street, and Ernst & Young are moving to 190 George Street out of 680 George Street.

Other possible lease requirements are from PwC, but suggestions are that with its move to AWB its demand for space has diminished.

It has been touted as a possible tenant at the third commercial tower at Lend Lease's Barangaroo South project.

A spokesman for Lend Lease said the group had not made any decision on whether to delay the third tower and was in discussions with potential interested parties.

A report from John Kim, at CLSA, says a delay of Barangaroo Tower 3 would be beneficial to DEXUS Property and Sydney landlords.

The head of tenant representation for Australia at Jones Lang LaSalle, Steve Urwin, said Australia's capital city office markets had moved further in favour of tenants in the past 12 months - both good and bad news for tenants.

"While there are great deals to be had, they are primarily as a result of subdued tenant demand due to cost-cutting, headcount reductions and nervousness in the outlook over the next two-year period," Mr Urwin said.

The head of tenant representation, NSW, at Jones Lang LaSalle, Gavin Martin, said while incentives - high at a general level of 25 to 30 per cent - encourage movements in the market place, tenants needed to justify any relocation. What was occurring was a preference to restructure and re-gear their leases to take advantage of the market conditions.