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26 Feb
ACORPP Market Voice - Three Things Tenants Can Do Now to Make Savings

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With Lisa Seun, Director ACORPP

 

Last November, Perth commercial office market was described as experiencing “the perfect storm” of falling demand with new supply creating high vacancy rates.

The Property Council of Australia reported Perth's vacancy rate increased from 16.8 per cent to 19.2 per cent over the previous six months. Brisbane’s vacancy rate remained steady at 14.9 per cent. Those vacancy rates are more than double that of Sydney.

Property Council Breakfast

 

The inevitable outcome in Perth and Brisbane has been agents and owners reducing their asking rents while dangling big fat incentives to attract tenants. Both cities are expecting their vacancy rates to further increase as more new space is completed in 2016. Don’t all those factors suggest it’s a great time for tenants? Well yes, perhaps for some.

I was recently invited to speak at the Property Council of Australia Office Market Report breakfast. The PCA publishes the office vacancy rate for each Australian capital city twice a year. The release of that data is a big event. In an environment of high vacancies, I offered some insight - as a tenant representative - on what ACORPP was doing differently in this market.

The room was mainly filled with people that I affectionately refer to as the “dark side” of the industry like agents and building owners - basically anyone on the other side of the negotiating table!  There was an air of doom and gloom.  It was important to not forget the underlying reason the vacancy rate is as high as it is.

 empty office space 2

The economies of WA and Queensland which had previously enjoyed the riches of the resources boom are now experiencing tough times in a climate of plunging commodity prices. However, there are still office tenants who are paying rents well above the current market rates.

They read the news and they can see the “for lease” signs marking building after building all over Perth. And within their own space, empty desks are constant reminders of redundancies and restructures. Tenants know they are paying too much - especially when they can no longer afford it. We recommend those tenants immediately review their lease expiry date and potential exit costs now.

Typically a tenant would only consider appointing a tenant rep when they have a major change in the operations (expansion or contraction) that means their premises are no longer suitable or alternatively when their existing lease is coming up for renewal. 

Our advice to tenants is not to wait and review it now. If you have about two or three years until the lease expiry, then it’s a good time to now consider renegotiating or relocating.

The decision-making drivers will be based around whether the building meets your needs and the cost-benefit number-crunching. In better times, owners would not even consider renegotiating the rent downwards, but the focus has shifted to tenant retention. 

Some owners are now willing to offer an earlier rent decrease in exchange for a longer lease term.

Shutterstock Negotiation 

If the building or location no longer meet your needs, then relocation is also an option with incentives high enough to cover new fit out costs.

Other common incentives used are rent free periods and more recently, rent abatements.

Conditions are not likely to get any better for landlords in the medium term. Market conditions are expected to worsen by the end of the year and we believe there are also many tenants withholding sublease space from the market that, if released, could further exacerbate the situation.

Unless there is a major improvement in global demand for our mineral resources then this environment of high vacancy is likely to continue for several years.

Time to get that lease out?

 

More commentary on the latest Property Council of Australia vacancy rates:
Office space vacancies reach 21-year high in Perth amid mining downturn (abc.net.au – 4 Feb 2016)
Falling values a rental crunch (The West Australian – 10 Feb 2016)

 

 

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