Office market well and truly in tenants favour: JLL

The pendulum has well and truly swung in favour of tenants. A new national office market report from Jones Lang LaSalle (JLL) has revealed that incentives are high and that an increasing number of landlords are willing to negotiate options that were unavailable six to 12 months ago.

In its latest, The Wrap research report, JLL found that landlords are prepared to write deals on space much further ahead of lease expiry than is typical, along with underwriting a tenant’s existing lease tail.

JLL’s head of tenant representation for Australia, Steve Urwin added that an "increasing number of institutional landlords were also prepared to consider pure effective deals with low rentals and no incentives – unheard of for a very long time – in an attempt to differentiate their offering in the market".

Driving those market conditions, he said was primarily subdued tenant demand due to cost cutting, headcount reductions and nervousness in the outlook over the next two-year period.

Breaking down the state of the individual market, JLL said the resources sector tail off had been a key influence in Perth and Brisbane, with the latter market also affected by significant government sector job cuts.

The delivery of close to 200,000 square metres of new stock in Brisbane in 2016 will further dampen the market, it noted.

In Sydney, negative sentiment led by the financial and legal sectors had resulted in the "increasingly strong sense that below replacement cost rental deals will continue from now until at least after delivery of the next wave of new projects in late 2015,” JLL said.

But in his closer assessment of Sydney market, JLL’s NSW head of tenant representation, Gavin Martin said that while 2013 had certainly seen the market move further into the tenant’s favour "it is not to the same extreme we faced in the 1990s with 20% plus office vacancy levels driving incentives as high as 50% of the lease term.”

He suggests that with current incentive levels of 30% available in a number of Sydney buildings, "this may be the tipping point for landlords.”

In short, Mr Martin believes that conditions in Sydney have got incrementally worse, not substantially worse, and "tenants may be advised to make the most of opportunities presented to them whilst the landlords are willing to ‘bank’ future income.”

On the Melbourne market, the report said that while the market had tended to avoid the peaks and troughs of rentals in other states “a large volume of sub-lease space and some new building completions are again fuelling negativity and increasing concern for landlords."