Raising the bar to hold onto office tenants

Deals offered to stay in current offices are now as enticing as those luring them away

July 29, 2022

Landlords have long offered deals to businesses to encourage them to extend their office leases. But now such deals are being matched by landlords trying to keep tenants from being lured elsewhere. It is a phenomenon previously unheard of, experts say, with rent-free periods topping the list.

Before COVID-19, landlords knew that moving was an inconvenience and that companies were invested in a building because they had paid for a fit-out, so incentives to stay were always lower, but now the bar has been raised.

Office markets are becoming more active than before the pandemic as businesses search for space better suited to their post-pandemic requirements. In turn, office vacancies are elevated in some markets, with landlords potentially facing more downtime between tenants.

In response, existing landlords are more likely to meet the market in terms of incentives.

Offers on the table

For the Auckland prime office space, incentives have remained unchanged at 16% in the last 24 months, and are forecast to reduce slightly towards the end of 2022.

Incentives on offer from landlords include capital contributions to upgrade fit-outs, rent-free periods, rent abatements, or a combination of all three.

When COVID-19 emerged in early 2020 and organisations started consolidating and handing back space as a result of the economic impact caused by this pandemic, we saw a sharp rise in incentives as vacancy rates increased, to varying degrees, across New Zealand office markets. Landlords were offering higher incentives to retain tenants or secure new leases in their assets. We noted instances where landlords were offering delayed commencements or additional costs to fund a fit-out for a tenant on top of the headline incentive figure during the peak of the pandemic.

Additional incentives are on offer in the form of delayed lease commencements - a form of additional rent-free outside of the lease term like increased allowances to upgrade floors and early break rights.

Building upgrades are front and centre for landlords hoping to retain tenants and keep occupancy levels stable. COVID has pushed health, wellbeing, and flexibility to the forefront of the minds of occupiers. In some buildings, the base level of expectation is for good end-of-trip facilities and an increasing need for flexible workspace in the building or lobbies.

To stay or go?

While incentives may be enticing, they are just one element to be considered for businesses deciding to move.

If a tenant is happy with its building, fit-out, and location, then staying put is a real option, but for those that need to use their space differently and are trying to change the image of their business or have a commitment to being carbon neutral by a certain date, that change will be easier to make in a completely new space.

While the current incentive trend is unprecedented, it may also be peaking.  

New Zealand continues with low vacancy across the office space precincts. As at the end of December 2021, vacancy was 7.4% on 3.964m sqm of total office space. Specifically for the Auckland CBD prime office space, vacancy is 9.0%, remaining unevenly spread across the CBD on a building-by-building basis with 45% of the vacancies in four properties. With low vacancies in this market, incentives are forecast to reduce to under 13% by the end of 2022, after remaining unchanged at 16% over the last 24 months.

We see rents nationally for office space having grown in the last 12 months, with the exception of Auckland secondary office space. For Wellington specifically we have seen a 1.85% increase in prime office rents, and 3.65% in secondary office rents. Rents are supported by Government occupancy filling approximately 50% of the capital’s office space.

With prime office space experiencing low vacancy, and occupiers increasing demand for high-quality environments, inclusive of high Green Star and/or National Australian Built Environment Rating System (NABERS) ratings to assist with the occupiers meeting their individual ESG requirements, it is expected that as the developments are completed, there will be strong demand for these properties.

The market has certainly been turned on its head, but tenants will be feeling like they are in advantageous positions. They should make the most of every opportunity.

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