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The rise of commercial property incentives

After a number of years of boom, when commercial tenants were often hamstrung by costly commercial leases and conditions, the pendulum has finally begun to swing in the other direction.

 

Vacancy rates in Perth are nudging past the 10% mark and are expected to rise to around 14% by 2016. Vacancy rates in Brisbane are currently sitting at 14.2%, which is the highest on record. With more office space currently under construction, further increases are likely. The Sydney market is sitting at 9% having remained relatively stable over the past six months and Melbourne is sitting at 9.6%, which has contracted slightly over the past year. 

 

Rather than reducing the commercial rental value of the property, and face subsequent resale devaluation and difficulty obtaining loans against the property, landlords are maintaining the high rental costs but offering incentives to potential leasehold tenants in order to fill their commercial spaces.

 

This new leasing environment has seen landlords offering 25 to 30% incentives in both the CBD and fringe office spaces. Justin Boelen from ACORPP’s Perth office said: ‘In the last six months there has been a massive change in the market definition of rent reviews, how rent reviews are structured and incentives have dramatically increased.’

 

He added: ‘There are some landlords that are still expecting certain returns. However, by and large incentives are commencing from 15% and pushing at 25 to 30% and the rent review terms and make-good provisions have dramatically eased to be more fair and reasonable.’

 

In Brisbane the situation is similar. Matt Buckley from ACORPP’s Brisbane office said: ‘With circa 187,000 sqm of space currently under construction, vacancy rates are expected to increase further. This has seen a fall in face rents and a significant increase in incentives to retain and secure tenants in existing buildings.’

 

Companies who are relocating usually do so as a result of a review, focusing on the cost and building’s ability to meet their needs. Incentives can often equate to free rental periods, although some tenants who don’t have much capital are using the incentives as a means of paying for fitouts.

 

Justin Boelen said: ‘Landlords are aware that tenants can relocate to equivalent or better spaces at attractive rentals and they are a lot more open to negotiation. Transactions are going through quite smoothly if they are fair and reasonable to both parties.’

 

So, while it’s clear that incentives have obvious benefits to tenants, they can also work in favour of landlords who are anxious to maintain a high rental value for their property. Incentives seem to be the best option for all parties to meet in the middle.

 

 

 

 

 

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