With Perth’s office vacancy rate still hovering above twenty percent, proactive landlords have been completing speculative fit-outs or redecorating high quality existing fit-outs as the competition for tenants has intensified.
Existing fit-outs can offer tenants a smoother and less complicated transition into new office accommodation. In fact, in the 2017 Perth market (as at July 2017), 87% of leasing transactions had some form of either speculative or existing fit-out.
Why opt for a speculative fit-out?
Whilst speculative fit-outs could be considered a high risk strategy from an owner’s point of view, anecdotally there is evidence that smaller tenants have a preference for brand new, fitted ‘plug and play’ type office space.
This strategy is particularly prevalent for tenancies from 200-350sq m, however some larger deals have transacted as well, such as Resolute Mining taking 1,200sq m of speculative fit-out at Australia Place, 15 William Street in April 2017.
Generic fit-outs with open-plan working environments that can accommodate a variety of industry groups, with the flexibility for tenants to make modifications, are strategically the preference for a speculative fit-out. Ideally the fit-out should encompass a unique space, offering functional variety and height adjustable desks and provide efficient workspace ratios.
Depending on size, the fit-outs should feature a reception/waiting area, boardroom, meeting room, collaborative area, staff breakout area and offer flexibility to make acceptable modifications if necessary.
Currently, landlords such as Brookfield and Investa are undertaking such works at their 108 St Georges Terrace and 66 St Georges Terrace assets.
An alternative: retain and redecorate existing fit-outs
The other alternative for landlords is to retain and redecorate better quality fitouts left behind by vacating tenants. The primary driver for this strategy relates to achieving cost efficiencies.
That is, if an existing fit-out can work for a new tenant, then they can take the majority, if not all of any incentive offered in the form of rent abatement, rather than as a cash contribution to build a brand new fit-out.
By not having to allocate a significant proportion of their incentive to fit-out costs, tenants can reduce their effective rental costs which makes it easier and more compelling for them to consider a relocation.
In this case, the majority of the time the owner will complete the redecoration by undertaking works that include (but not limited to) new reception, breakout area and boardroom/meeting room whilst removing any fit-out that could be perceived to be dated.
The rise of commercial display suites
Landlords are under increasing pressure to present their office assets in ready-to-use form, a trend which could see owners using display suites in much the same way that developers use them to present their apartments to the market.
Tenants have shown a preference for brand new, fitted, ‘plug n play’ type office space and recent activity suggests savvy landlords are achieving increasing inspection numbers resulting in reduced letting up periods, earlier income returns and higher face rents when this sort of product is offered to the market.
We believe that over the next few years, we will increasingly see owners creating display suites in order to demonstrate the quality of their asset and the point of difference with their competitors.
Perth CBD Office Leasing Activity (sq m by number of deals)
See below a selection of recent leasing transactions that have taken place in Perth on the back of a speculative fit-out or redecorating an existing fit-out:
Perth CBD Office Leasing Activity (sq m by size) for 12 months to Mar-17
More than 109 lease transactions, below 1,000sq m, were recorded in the 12 months to March 2017, totalling 43,900sq m, and accounting for a third of total leasing volumes, with the average lease transaction having an NLA of 400sq m.
In terms of size, owners should focus producing fitted out tenancies below 1,000sq m. The chart above clearly highlights in terms of volume there is significantly more transactions occurring below 1,000sq m.
Anecdotally, the most common direct enquiry size for tenants looking for space currently in the CBD is 200sq m to 350sq m. Owners that can have ready-to-go, plug in and play speculative or revamped fitted out tenancies will be well placed to tap into this enquiry, entice tenants to relocate and subsequently secure new leasing transactions.