City landlords feel the heat
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.
Frequently Asked Questions about this Article…
Office landlords are under pressure because new office supply, a limited pool of large-scale tenants, confirmed tenant departures and a move by companies to downsize (adopting activity-based working and more offsite work) have reduced demand and increased vacancy risk in city markets.
Landlords are offering generous lease incentives—often in the order of 25–30% or more on some new deals—including rent abatements, free fit-outs and non-penalty break clauses to keep occupancy levels high.
Major moves—like Herbert Smith Freehills leaving the MLC Centre for 161 Castlereagh Street, Macquarie Bank relinquishing space at 1 Martin Place, and Ernst & Young relocating to 190 George Street—create short-term vacancy and force owners to renovate, re-lease or offer incentives, which can pressure rental income for property owners and REITs.
As companies adopt activity-based working and more staff work offsite, they typically require less physical space, reducing overall demand for traditional office floor area and prompting tenants to restructure or re-gear leases to suit smaller footprints.
Yes — a report by John Kim at CLSA suggested that delaying Barangaroo Tower 3 would be beneficial for DEXUS Property and other Sydney landlords by limiting new supply pressure while the market rebalances; Lend Lease has said it is still in discussions and has not decided whether to delay.
Yes. Tenants can secure ‘great deals’ driven by subdued tenant demand—benefiting from high incentives, favorable lease terms and the ability to renegotiate or re-gear existing leases as landlords compete to retain or attract occupiers.
Owners are renovating vacant space (for example MLC co-owners GPT Group and Queensland Investment Corporation are refurbishing MLC Centre space), engaging with a range of potential tenants, and in some cases redeveloping other assets (such as Charter Hall’s activity around 333 George Street) to improve leasing prospects.
Investors should monitor tenant demand trends, incentive levels (commonly 25–30%), major corporate relocations, new supply decisions like Barangaroo Tower 3, and how owners are managing vacant space—because these factors directly affect occupancy rates, rental income and the valuation outlook for office property investments.
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