There has been a lot of talk this month about it being a full year since Melbourne’s “long lockdown” started – especially at a time when Sydney’s latest lockdown is being extended and increased, in terms of the restrictions that those of us living and working there need to observe.
There’s been plenty of talk as well about how Australian office life “will never be the same again” – and what that might mean for Australian businesses. But looking back, what are the facts ? And what do you need to know and do, as a business owner who leases office space ?
I’ve been working with Australian commercial property tenants for over 20 years, and its true that the last 12 to 15 months have been extraordinary – but there are some real facts and trends that I think people need to know:
- Prior to COVID19, major office markets were seeing continual face rental growth and tightening incentives on the back of increasing demand. This was not unexpected, giving higher urbanisation and migration rates and the continuing swing towards an increasingly services-based, high “in person collaboration” based economy.
- When the first impacts of COVID19 restrictions were experienced in March to July 2020, businesses focused on operational processes to transition their workers to “working from home” where they could. Sure, there were schemes in place to reduce and defer rent, but the longer term strategy was not on most business owners’ minds, in Australia at least.
- During that period, research by Knight Frank showed that 32% of new office leasing mandates were put on hold, 19% of active mandates reduced their size requirements and 12% of tenants opted to stay put or cancel their requirements.
- Of course, when restrictions were lifted many staff proved reluctant to travel back into the office – and at this point more businesses started to turn their eye to the longer term opportunity. Might they be able to actually reduce their current office lease requirements outright, not just postpone growth plans ?
So, as 2020 rolled into 2021, I’ve seen the following trends for office tenants:
- Reductions in demand for office space have continued and even increased.
- Tenants’ financial focus have remained on cost reductions and cash retention.
- Tenants facing renewals are actively seeking fitted out spaces on shorter term leases, or subleasing surplus space if they had long term commitments
- Short-term lease extensions are being negotiated, to enable time to assess the future “new normal” for office needs.
Looking at trends over the same period for office lessors, they are:
- Maintaining headline (or “face”) rents but increasing incentives.
- Looking to tie rent relief to lease extensions, to increase their own certainty.
- While there have been limited lease transaction volumes, they do prove that the market has softened.
Turning to current trends:
- Lessors are still maintaining face rents.
- Incentives have definitely increased.
- “Hidden” incentives are now being offered to relocating tenants.
- Tenants are still seeking fitted out options.
- Vacancy rates are still expected to increase.
- Yet leasing activity is increasing again – after all, we can’t wait forever to find out what “the new normal” looks like.
So when I am asked for my “top three” advice about how to handle current office leasing needs, I say:
- Have a good think about how you really want your staff to work – how will work from home trends settle in your sector, post COVID19 restrictions ? And how well do you know what your people really want from you – or a competing employer ?
- Make sure that you know the facts about real space availability and rent trends in your market – don’t just rely on what a commercial real estate agent wants you to believe. After all, they gain from any upside on the deal – and at your expense.
- Engage a tenant advisory agent like myself who knows what the lessors are really prepared to offer you – they know how to tease out those “hidden” incentives from past dealings.
In uncertain times like these, inside specialist information about commercial leasing is more valuable than ever – so don’t hesitate to ask people like me for help when you are making these critical decisions about your future office needs.