Office leasing incentives may become less generous as landlords raise rents and vacancy rates reduce in 2023.
Currently, tenants are enjoying their choice of rent-free periods, rent abatements and impressive fit-outs. But as more workers are lured away from their home offices and into workplaces this year, agents expect landlords to ease up on the offers.
However, this doesn’t mean incentives will completely disappear, says James Montague, JLL’s senior director and head of office leasing Queensland.
“Our expectation through 2023 is that we will see some incentive compression,” he says. “It will start to track down, but I don’t think it will be a huge plummet of incentives. What we see is, when vacancy rates start to come down, and supply shortages occur, then the deals start to tighten up, so we’ll get a bit more rent and fewer incentives.”
Research based on 2022 points to a split market on incentives with more on the table for tenants at lower-quality offices and less on offer for tenants at higher-quality offices.
“Incentives are still experiencing upward pressure, particularly for lower-quality secondary assets and assets in poorer locales, as owners compete for active tenants with the supply and demand axis in the tenants’ favour,” says Colliers’ CBD Office Snapshot for the fourth quarter of 2022.
Landlords of premium buildings with top amenities and a high level of environmental, social and governance (ESG) initiatives generally have the leverage to demand higher rents. But Bianca Ziegenfuss, senior analyst at JLL, says rent increases may need to be tempered due to climbing interest rates.
“With tenant indecision returning as a consequence of the rising cost of debt and general macroeconomic uncertainty, landlords may need to soften their approach to rental increases in the near term,” she says.
JLL’s analysis of CBD markets in Sydney, Melbourne, Brisbane, Perth and Canberra shows a minor lift in incentives from 37 per cent in the fourth quarter of 2021 to 37.5 per cent in the same quarter of 2022.
The current incentive trend in today’s ‘flight to quality’ market is speculative suites. Spec suites come with everything a business needs to move into an office without investing time or money in the fit-out, Montague says.
“Instead of just carpet and painted walls and glass, it’s fully functioning boardrooms with TV screens hooked up with AV systems, sit and stand workstations, fully functioning kitchens … Really that turnkey, fit-out solution,” he says.
High-end fit-outs will be a common incentive offered by landlords with an eye on value this year, says Aaron Weir, director at commercial property group Resonate Partners.