One of the significant tools employed with negotiating commercial leases is the forward-looking sentiment of the landlord. In downward looking markets where the expectation is that things will get worse before they get better, the landlord is willing to provide significant inducements and concessions in an effort to stave off long term vacancy within their portfolios. This has been the situation in Perth since mid 2012, resulting in the fall in average effective net rents from the peak just below $700 per square metre per annum in prime offices to the mid $200’s at the end of 2017.
It appears these days are slowly coming to an end.
The recently released Dexus Australia Real Estate Quarterly for Q1, 2018 has cautiously signalled a retreat in Incentives and a rise in Net Rents in the mid-term on the back of improving jobs growth and no significant office stock additions forecast in the near term. This statement from one of Australia’s largest institutional owners serves as a signal that landlord sentiment has begun to change.
The implications for tenants will be the changing attitudes to negotiation. This will not only start to impact the available incentives and commencing net rent but will also begin to impact other elements including review structures, yielding-up obligations, surety requirements and other aspects of leases.
At present, the effective availability of large format office space (> 1,000sqm floor plates) in the key Western CBD market is limited to three or four properties. Whilst a tenant seeking over 5,000sqm will have a very challenging time seeking leverage in negotiations.
For tenants with renewals or market reviews in the next 18 months, now is the time to engage with your landlord to commence the process of renegotiation.