“Don’t let a lease tail effect your workplace strategy”
There is no need for your current lease obligations to stop you from implementing your optimal Corporate Real Estate (CRE) and or workplace strategy. The tenant friendly Brisbane office market means there are great incentives and savings to be made. So, to ensure you don’t miss a great opportunity, we’ve outlined the benefits of Stay Vs. Go and the implications of each.
With so many tenants undergoing a transformation of their workplace strategy, what are the factors driving activity?
There are several reasons you may wish to look at an office upgrade or relocation, such as:
- Office Size: Your current premises may not accommodate your current number of staff or allow for future growth.
- Workplace Performance: Your current workplace may not be designed for efficiency, agility, and flexibility, let alone what represent what you and your staff are endeavouring to do together.
- Occupancy costs: The financial obligations of your current premises may be compromising your bottom-line.
The current market encourages activity today.
The Brisbane office market is geared heavily in favour of tenants, with Brisbane’s CBD experiencing 16% vacancy levels across all building grades.
Traditionally, only tenants with large (2,500sqm+) accommodation requirements would engage a CRE strategy before their current lease ends. However, this market is allowing tenants of all sizes to engage a CRE strategy up to 3 years out from expiry to take advantage of the following tenant friendly conditions:
- Stable or slowly increasing face rentals
- Incentives of 40% +
- Reduction of non-key commercial terms (make-good, rental reviews etc), and
- Landlords wish to retain existing, and secure new tenants
Most tenants only get the opportunity to conduct a lease review every five to seven years, however, with the current market conditions many tenants are realising significant operational benefits from implementing one of the strategies outlined below.
What happens to the lease tail and remaining financial obligations?
You have two choices – Stay or Go.
Remaining rental and make-good obligations are an important factor in driving a CRE strategy.
If you choose to stay at your existing premises you’re likely to:
- “Blend and Extend” – as the tenant you would trade your current lease obligations for a new deal at market rates on an extended term.
The landlord and tenant come to agreement on a new seven-year lease to commence in line with the current market. The landlord benefits by increasing the tenant’s obligations from two to seven years and the tenant benefits by reducing their current rent and setting their next seven years of obligations, at current rates.
- Secure an option period at current market rates.
The landlord agrees on terms (representing current market conditions) for a new five-year lease, to commence upon completion of the existing agreement.
In either instance, you as the tenant are “trading” with the landlord, providing them with improved WALE (weighted average lease expiry) for a market reflective deal. This allows you as the tenant to access an incentive or capital contribution from the landlord to:
- Fund any necessary workplace/fit-out adjustments
- Apply as rental abatement, or
- A combination of the two.
If you choose to go you might consider:
- Direct lease space in alternate premises:
- This deal would be done directly with the landlord of your new premises, and the commercial terms should be in line with the current market.
- You may wish to download our white paper > “How to extract maximum value from the commercial office leasing market.”
- Sub-lease space in alternate premises:
- This deal would be done directly with an existing tenant in the building, who isn’t utilising all or part of the space.
- Subleases generally have an existing fit-out in place and lower face rentals, allowing for the incentive to be used for any necessary fit-out adjustments and further rental reduction
- Pre-committing to a new development
- Landlords/developers are often seeking commitment from tenants prior to construction and delivery of a site. This may also allow you the opportunity to have a building/tenancy designed and constructed specifically for your needs.
- Pre-commit deals are generally struck on terms that are more tenant friendly than the current market.
Each of the above options will include an “incentive pool” or contribution from the landlord. In the case that there is a significant landlord contribution, the tenant would use the incentive to cover some or all of the existing financial obligations attached to their current lease.
Regardless of your lease expiry, the current market presents a compelling case to reconsider your workplace strategy. Whether your business decides to “Stay or Go” the current leasing climate allows the opportunity for you to improve your workplace strategy by improving operational efficiency and reducing total costs.
If you would like more information on dealing with a lease expiry or tenant representation services please don’t hesitate to contact PCG