9 April 2024

What commercial landlords need to know to top this market

| Dione David
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Sign in office window advertising office space for lease

There are ways commercial property landlords can prepare for success in a challenging market. Photo: Andrey Popov.

In a post-COVID market, where hungry trades and online retail clientele snap up industrial commercial properties, office space has yet to regain its footing – but there’s hope.

As commercial property owners grapple with the new order, experts say the most proactive landlords will prevail.

“Commercial properties in Canberra’s four industrial suburbs – Mitchell, Fyshwick, Hume and Beard, and those service trade areas of Belconnen and Phillip – are hotly contested. If we get a listing for a warehouse, it flies out the door,” Raine & Horne Commercial Canberra Managing Director Mark Nicholls says.

“Retail is bouncing back, but over in the office market, there’s a fair bit of vacant space available for lease in Canberra.”

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In this market, Mark recommends repositioning an office building to broaden its appeal.

Attractive and versatile fitouts, and refurbishing common areas such as the entry foyer, bathrooms and external façade, will widen the prospective tenant pool.

“Dated fitouts and a lack of lift access can make office space difficult to shift,” he says.

“New carpets and a lick of paint can work wonders, but tenants must be able to see themselves in the building. So keep it neutral and bring it back to a nice, open plan.

“Tenants are also looking for ways to incentivise their staff to come to the office. ‘End-of-trip’ facilities such as bike storage, showers and lockers go a long way.”

Helping prospective tenants facilitate active travel for their employees helps with another drawcard – energy efficiency.

“For a lot of office tenants, including government, one of the first things they’ll ask is about the building’s energy rating,” Mark says.

“Increasingly, businesses are honing in on the country’s net zero goals. Some won’t even consider a building with a gas connection or dated lighting.”

man in office

Raine and Horne Commercial Canberra director Mark Nicholls says proactivity is critical. Photo: Michelle Kroll.

With any capital investment, however, careful consideration should be given to the long-term financial implications and how these should be represented in your legal agreement with your tenant.

Special Counsel in the Leasing department at MV Law Jennifer Jaeschke says this is particularly important if it involves ongoing expenses.

“If you’re going to provide consumables such as towels in your end-of-trip offering, for example, you’ll need to think about whether you’ll recover those costs from your tenants and, if so, how you’ll structure that recovery. Will you charge a higher rent or ask your tenants to contribute an add-on cost on top of their rent?”

Rent-free periods at the commencement of the lease, rent abatement or contributions towards a tenant’s fitout can all contribute to attractive leasing terms.

However, Mark warns against taking too big a hit on rent as it can impact your property’s long-term market value.

“If you normally lease a property for $100,000 a year and accept an offer for $70,000, you’re effectively devaluing that property. When it comes time to sell, it’ll be valued based on the rent that’s being achieved,” he says.

“Our advice is to keep your rent as close to the true value as possible but offer up-front incentives at the start of the lease or cash contributions towards fitouts. That’s just a hit you take at the start.”

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If you’re offering a fitout, however, consider (and carefully document) its fate at the end of your lease agreement.

“Do you want to own that fitout at the end of the lease so you can offer it to a new tenant? For shorter three to five-year leases, retaining that fitout could be of substantial value,” Jennifer says.

“For that reason, a landlord might consider it better to foot the bill for the fitout rather than offering their tenant a cash incentive to do it themselves. That way, they can control the product that they have to offer new tenants in the future.

“In terms of rent abatement, landlords may want to document that in a side deed to make it more confidential, so it’s less likely to impact the future rental value of the property or other properties in your portfolio.”

Jennifer Jaeschke of MV law

Jennifer Jaeschke says cutting corners with legal documentation may cost you in the long term. Photo: MV Law.

Effective marketing is often undervalued in an investment property’s rental performance or sale result.

Using professional photography and videography to show the property in the best light, enhancing listings so they sit at the top of search results, and paying to promote the property with targeted social boosting and prominent signage are all areas where landlords can be tempted to cut corners.

The same goes for selecting the professionals who represent you. Using an exclusive agent with good branding, positive online reviews and strong experience negotiating lease terms might require a bigger upfront investment, but it improves the long-term outcome.

“There’s a saying: the most expensive thing you can do is go with the cheapest agent and marketing package – that especially applies in a saturated market,” Mark says.

It’s a similar story for those drafting your legal documentation.

“We’re seeing more hybrid arrangements these days, and you might end up with a hastily tweaked template lease that doesn’t reflect the deal between the parties and can result in costly complications down the track,” Jennifer says.

“You want a legal representative who will be able to adapt the lease documents to the deal you’ve done and represent your interests in the lease.”

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