Melbourne landlords tempt tenants with generous incentives

Landlords are having to rebate office rents by more than a quarter of their value to attract tenants as the vacancy rate rises in Melbourne's central business district.

Landlords are having to rebate office rents by more than a quarter of their value to attract tenants as the vacancy rate rises in Melbourne's central business district.

In contrast, incentives in Sydney have stabilised as vacancy rates contract, albeit for the premium and A-grade office assets.

Conditions have shifted dramatically in favour of tenants in Melbourne as competition between building owners pushes incentives to levels not seen since the market downturn of the early 1990s.

With the CBD office vacancy rate hitting 6.9 per cent at the end of last year in the latest Property Council of Australia Office Market Report, 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 said some "highly motivated" landlords have offered incentives as high as 35 per cent on long-term leases to fill their buildings, although the sources say 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 per cent to 26.7 per cent over the same period.

"The pendulum has well and truly swung in favour of tenants at the moment," national director of office leasing for Colliers International Andrew Tracey said.

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 last year. Meanwhile, leasing enquiry was at 60 per cent of the level recorded in the previous year.

"You can't fight the market," Mr Tracey said. "You can make the decision as a landlord that you want to sit it out for a little while, but ... if they are good quality tenants then it's better to have the income there. It's pretty important from a valuation perspective."

But Colliers International also believes incentives may have "peaked", with demand likely to improve as a number of 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 in 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 market it makes a lot of sense," he said.

State head of leasing for Jones Lang LaSalle Stuart Colquhoun said it was possible incentives could peak at an average of 30 per cent by the end of the year.

He said a minority of deals involved rent-free periods. "The incentive provides cheap financing for the tenant to fund the capital expense of the fit-out," he said. "But it also allows the landlord to maintain the same face rents, which they just don't want to reduce."

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