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News

26 Aug
MARKET VOICE – Sub-leasing is the new black

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By Justin Boelen

Subleasing in the Perth office markets has emerged as one of the biggest influences to face rents as the market continues to endure the pain of high vacancy rates within the Perth CBD at 16.6% and West Perth at 11.1%. 

It is now estimated that more than 80,000 square metres of office space is currently offered for sublease. To put this in context, imagine the BHP Building in Brookfield Place, then stack a few more floors on it, then imagine it vacant.  The huge amount of space is mainly left by tenants who have downsized their space requirements and major corporates that leave a vacuum after shifting into new buildings before their old lease expires. 

 

BHP Billiton Building

 

Subleased space is being snapped up for as little as $300 per square metre while landlords had been trying to maintain a face rent ‘line in the sand’ nearly double that. Some have effectively lost potential new tenants to existing tenants who are desperate to offset their rental commitments, their second biggest cost behind wages.

It’s good news for those who snap up a sublease in the CBD.  There will never be a better time to take a flight to quality. But this new momentum is creating a two speed lease economy with building owners squeezed out of the equation. And this pressure on landlords does not stop there with vacancy rates high and still yet to peak.

Right now the Property Council of Australia estimates total Perth CBD stock at 1,636,104 square metres. Total vacancy is 270,793 square metres. That equates to a vacancy rate of 16.6 per cent. And that’s the highest level in nearly two decades.

Pie chart

But it’s likely to get a whole lot worse in the next six months as 134,556 square metres of new space enters the market. ACORPP predicts that landlords will have to accept a greater reduction in face rent to stimulate interest. Something will have to give and it’s most likely going to force a resetting of face rents and incentives.  

New prospective tenants and existing tenants up for renewal are in the box seat. A flight to quality or simply greatly enhanced terms and conditions in a renewed lease will be standard for the foreseeable future. Landlords need to consider improving their properties to compete with emerging stock and consider how they can better retain existing tenants. They may have to design the proverbial golden handcuffs when it comes to new leases.

Building owners with new stock on the way will need to promote the features and benefits of their properties and be prepared to do whatever it takes to sign up a tenant.

 

By Matthew Buckley

The situation in Brisbane isn’t hugely different with the sub lease market very active and offering rental options far below the balance of the market and with the potential benefit of a fitout.  This provides – assuming the fitout works – is providing a huge once in a generation opportunity to secure high quality office space at rates which are significantly below cost.

The only word of caution ACORPP is putting forward to tenants is to ensure that the standard of accommodation is actually something that the business can sustain in the future.  “Once your staff have become accustomed to a high level of building, the services they provide from lifts, foyers, natural light, end of trip etc it is potentially a major issue to go backwards. 

When you need to sign your next lease and the market conditions have become more “normal”, if your business can’t afford the level of rent, then we would caution taking occupancy in those spaces today.

The market in Brisbane has actually improved slightly with a couple of buildings removed from the leasing market which has improved the vacancy figures.  With the new buildings at 180 Brisbane, 480 Queen and 1 William still to enter the market with the backfill space from various tenants who pre-committed, the overall market conditions are not expected to swing back to landlords in the short to medium term.

 

Brisbane Skyline 

 

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