Advantage: tenant
Advantage: tenant Seizing opportunity in Melbourne’s tenant-favourable market
Market adversity creates real estate advantage The current economic climate is placing unprecedented pressure on businesses. Facing compressed revenue and margins, companies must reduce costs and remain competitive.
But these times also create significant opportunity. A dramatically changing Melbourne real estate market has become fertile ground for the well-prepared company to leverage its tenancy, reduce near-term costs and gain long-term competitive advantage through its real estate. Learn how companies are taking advantage of one of the most tenant-favourable markets in the past 15 years, and what you can do to position your company to benefit from the current environment.
Jones Lang LaSalle • Advantage Tenant
This is your opportunity • Reduce occupancy costs immediately
Tenant Leverage Index
• Lock-in low, stable long-term costs
Overall the Australian commercial property market has taken a huge swing in favour of the tenant over the last 12 to 18 months. Increasing levels of sublease space, de-centralisation and consolidation are driving vacancies up. Increasing vacancy rates are placing upward pressure on market incentives as tenants have more options to choose from. Increasing incentives are driving down gross effective rents, which in turn will drive down face rents once realistic ceiling levels have been reached. All of these factors make for a “tenant market” on the back of an extremely strong “landlord market” between 2004 and 2007.
• Avoid significant capital investment • Upgrade the quality of location, building or space • Negotiate increased flexibility to renew, expand or contract • Leverage a better deal to remain in current space
By analysing the relationship between the current forecast supply/ demand balance and the predicted growth in net effective rents1 over the same period, we have created the Tenant Leverage Index, using the latest forecast numbers from Jones Lang LaSalle Research. The current “tenant market” is expected to peak in mid to late 2010, and whilst the advantage will still remain with occupiers beyond that date, it will certainly start to move towards owners as market incentives start to decline, more demand returns to the market and vacancy rates start to compress. This will much reduce the leverage that an occupier has over a landlord when at the negotiating table beyond 2010.
Tenants’ Window of Opportunity: Tenant Leverage Index - Melbourne CBD 200
130
More Supply
100
120
50
110
0
100
-50
90
More Demand
-100
80
-150
Leverage Index
Indexed Supply/Demand
150
140
70
-200
60 Mar-08
Mar-09
Mar-10
Mar-11
Supply/Demand Balance
Mar-12
Mar-13
Tenant Leverage Index
Source: Jones Lang LaSalle, Research
Making real estate your competitive advantage Occupancy costs are typically a top-three expense, and the hardest to adjust quickly. Lease commitments often span numerous real estate cycles, locking in your costs irrespective of changes in economic conditions. But the game has changed and tenants are benefiting. Landlords want to retain quality tenants, and are more willing to recast a lease well in advance of expiration–or even to reduce rent in return for a longer commitment. Landlords seeking new tenants are also getting creative–removing impediments to tenant relocations using lease buyouts, increased lease concessions, large capital contributions or turn-key fit-outs.
1 Net Effective Rent = rent payable after market incentives (rent free period) but removes outgoings.
Jones Lang LaSalle • Advantage Tenant
Start now: time = advantage The market has changed – tenants have the upper hand
Why you should focus on your real estate now While the typical timeline to develop and implement a real estate strategy was 12 to 24 months, an increasingly tenant-favourable market has redefined the window of opportunity. By very publicly engaging the market early in the process, you can maximise leverage with your existing landlord, and increase the chances of finding an ideal relocation opportunity.
Only 12 months ago, landlords were in control. With strong rent growth expectations, few landlords would negotiate new transactions before a tenant’s lease expiration, preferring to wait as the market continued to rise. Vacant space was viewed as a landlord’s opportunity to create additional value. Today, the tables have turned. An unprecedented volume of space is coming back on the market. Rents have remained flat or have reduced and effective rents – after factoring in concessions for free rent and fit-out allowances – have declined by as much as 15%.
Timing the market means starting now You can’t perfectly time the market’s bottom, but you can leverage the market now by proactively evaluating all of your options without pressure to act. By starting early, you maintain control, and take action only when the opportunity meets your strategic, operating and financial objectives.
Engage while leverage is highest. Maximise your options. Act when you’re ready.
nc
ca Va
L e v e r a g e
y
Re
nt
Countdown to lease expiration
5
years
4
years
3
years
2
years
1
year
Lease expiration
Take advantage of a tenant-favourable window of opportunity and avoid a landlord-favourable market. With the dramatic drop in tenant demand, proactive landlords will renegotiate leases early and offer incentives to motivate new tenants to relocate or stay put for an extended term – covering large capital outlays for fit-outs or taking over a tenant’s remaining lease obligations. With these historic roadblocks eliminated, tenants with expirations even two to five years out are finding aggressive and creative landlords who are looking to make deals today.
Jones Lang LaSalle • Advantage Tenant
Why landlords will talk now The debt markets remain challenged, causing many owners concern about whether they will be able to refinance loans that mature in 2010, 2011 and 2012. This places a strong premium on maintaining stable property cash flows through high occupancy levels. The impact of capital markets forces
Anticipating a swift demand rebound
Because debt placement on commercial properties has tightened, landlords are increasingly motivated to attract and retain tenants. Owners don’t want to risk large vacancies in the foreseeable future. Those with low leverage have the financial flexibility to offer aggressive economic terms to lock-in quality tenants. Landlords with significant debt, and their lenders, need to protect investment value and secure cash flow. In either case, tenants reap the benefits.
The Melbourne CBD has entered the current downturn with vacancy below equilibrium for the market. This provides a unique opportunity for occupiers to reduce real estate costs. Unlike the 1990s recession, when the market was over-supplied (see table below), around 90% of new development is pre-committed and rising vacancy over the course of the next 18 months will be a symptom of increased sub-lease availability and backfill space. Jones Lang LaSalle expects vacancy to reach a cyclical peak in early 2011 at around 10% to 11%. Given the lower peak than previous cycles, and the severely controlled supply pipeline, the rebound in demand will result in a sharp tightening of vacancy rates. Even when supply does re-enter the market, stimulated by the demand increase, the time it takes to plan and build a new office building and the lack of finance readily available, means there will be a lag effect before space is available to occupiers.
Creditworthiness is still important to landlords, but they are increasingly looking beyond blue chip tenants to diversify their portfolio and manage sector risk. Quality tenants, regardless of size or industry, will attract interest from owners. Even in fully-occupied buildings, landlords are motivated to engage with stronger tenants to hedge their risk against weaker tenant defaults.
The effect of sublease space on market economics And there’s a new landlord in town competing for tenants – corporate Australia. Downsizing companies have placed a significant supply of sublease space on the market. Attractive pricing for these newly built and furnished subleases is creating downward pressure on market economics, forcing landlords with second-generation space to compete more aggressively for tenants. Sub-lease space currently constitutes 27.6% of the overall vacancy in the Melbourne CBD, or 66,100 sqm of space.
The elusive market trough Landlords and tenants alike are trying to pick the bottom of the cycle. Once landlords anticipate that the market is approaching a turning point, they will be less willing to negotiate – incentives will rapidly decrease, rental and fit-out concessions will be taken off the table and the pendulum will swing back into their favour.
Typically the Melbourne CBD has followed a four year cycle in a market downturn. In years one to two (2009 & 2010) downsizing and the disposal of excess space increases direct and sub-lease vacancy, providing a tenant favourable environment for lease negotiation or restructuring. In year three (2011) the green shoots of recovery result in the absorption of ‘soft vacancy’ within a portfolio, while the fourth year of the cycle has resulted in an absorption figure well in excess of long-term averages. An expected economic recovery in 2011 will be the catalyst for white collar employment growth and a strong demand rebound in 2012.
Strong Demand Typically Follows a Downturn 150
Melbourne CBD Office Market in Previous Downturns Development Pipeline (sqm)
% of Total Stock
Vacancy Peak
1982 Recession 1990 Recession 2001 Slowdown
4.1%
176,110
8.0%
7.8%
5.3%
789,175
29%
25.8%
7.5%
76,075
2.3%
10.2%
2009 “Recession”
5.2%
267,720
6.5%
TBD
Net Absorption (000s)
Vacancy Start of Downturn
100 50 0 -50
-100 -150
Source: Jones Lang LaSalle
Year 1 1990 to 1994
Year 2 2001 to 2004
Year 3
Year 4
2009 to 2012
Source: Jones Lang LaSalle, Research
Jones Lang LaSalle • Advantage Tenant
How to extract value today Early renewal
Relocate with your current landlord
• Reduce costs now
• Reduce costs now
• Secure long-term advantage
• Eliminate subleasing risks
How it works
• Relocate at minimal cost
If your rent is above market, a smart strategy is to reduce today’s rent to market rates–typically a decrease of 15-20%–in return for an early commitment to extend the term of your lease. This “blend and extend” strategy allows you to immediately reduce real estate costs. Your landlord avoids the significant cost and risk of finding a replacement tenant. This also stabilises cash flow, an important factor for property refinancing. Early renewals may also involve the give-back of surplus space, providing you another option to immediately reduce costs. Example: A media and communications group went to the market and their existing landlord 2.5 years before their lease expiry. Jones Lang LaSalle assisted with the review of alternatives and negotiated a new term in the existing premises reflecting a 17% rental reduction, a large incentive and significant upgrade works to be undertaken by the landlord.
Use concessions to bridge the gap
How it works A motivated landlord might be in a unique position to offer a lower cost space alternative within your current building, or within another property in their portfolio. Similar to an early renewal, you may benefit from a rent reduction of 15-20% in return for an early commitment to extend the term of your lease. You may also have an opportunity to give-back surplus space, enhancing your potential savings. Example: A telecommunications company wanted to relocate to a design and construct premises that reflected their new way of working. Jones Lang LaSalle negotiated a deal with a developer, with the existing owner purchasing the development to facilitate holdover until completion. The new lease with the existing landlord allowed for greater flexibility for expansion and contraction.
Lease takeover
• Relocate at minimal cost
• Eliminate subleasing risks
• Eliminate subleasing risks
• Secure long-term advantage
How it works
How it works
In some cases a lease takeover may not be feasible, and landlords use other incentives to help you make a move in this extremely capital constrained environment. Landlords may offer extended free rent periods (12+ months), funds to fit-out your new space, and other concessions that enable you to transition into new space without the burden of a large capital outlay.
If your lease still has some time to run, there are challenges to relocating. There are risks associated with finding a sublease tenant for your existing space, plus carrying costs for two locations until you do.
Concession packages are structured to respond to your particular situation. For instance, an 18-month free rent period may be negotiated in one case to bridge an existing lease obligation, while a fit-out allowance of $800 to $1,200 per square metre may be granted in another case to overcome capital challenges. Example: A financial services company with 12 months remaining on their lease negotiated and achieved a 12 month rent-free period on a five year lease and a fit-out at the landlord’s cost.
Jones Lang LaSalle • Advantage Tenant
Today, a new landlord may be willing to assume, or takeover, your current lease obligation. You transfer the risk and cost to the new landlord in exchange for your commitment to relocate and sign a long-term lease. Example: A legal firm occupying 20,000 sqm with a lease expiry in late 2013 have committed to a new building in the CBD to complete in 2012. The new owners are picking up the lease tail and providing a new fit-out for the tenant.
Whether your lease expiration is in nine months or five years, you can benefit from today’s tenant-favourable market. Tenants who understand their occupancy requirements, value proposition, and prospective landlord’s motivations can extract long-term value using one or more of these strategies.
Trade-up
Turn-key option
• Secure a more desirable location/building
• Eliminate capital costs
• Upgrade the quality of your space
• Get brand new construction
How it works
• Customise your space
The significant rise in rental rates between 2004 and 2008 priced many organisations out of their preferred locations. To contain costs, companies with expiring leases made hard decisions about moving to less favourable locations. This disrupted employee commuting patterns, created a recruiting and retention disadvantage, and moved them away from clients. With the steep decline in occupancy costs, it’s no longer cost prohibitive to remain in place. And, you have opportunities to move to a more central location, or upgrade to a better quality building with amenities that are important to employees and more attractive to clients and prospects. In today’s market, you can use your real estate to upgrade your brand and your franchise, without necessarily increasing costs. Example: Jones Lang LaSalle acted for a legal firm who moved from a fringe location in the CBD to the prime core at a lower annual cost than their current premises locked in for 10 years.
How it works Capital constraints are a primary barrier to relocation. To address this impediment, a landlord whose cost basis allows additional investment in a property may fund a full fit-out of new space for an incoming tenant. In prior cycles, landlords had a typical fit-out allowance concession–for example, $500 per square metre. If the landlord invested $850 per square metre into the space, he would finance the additional $350 per square metre with a higher rental rate for you, the tenant. What has changed? Now landlords are betting that a good fitout will be reusable by the tenant after you. Example: An IT company received a good quality fit-out for a three year lease across 1,200 sqm. The landlord made the investment on the assumption that the tenant will extend their lease or the space would suit new tenants that they could attract into the building.
Take a fitted-out sublease • Eliminate capital costs • Benefit from a high quality fit-out • Reduce overall occupancy costs How it works Some of the best space on the market was built within the last six to 24 months, but is now sitting vacant because organisations have downsized. These surplus leases are liabilities, and many companies are looking solely to recover a portion of their committed cost–not to make a profit as an owner/operator of real estate would. If the space is right for you, you get a bargain rent, take advantage of the existing fit-out, and in many cases can negotiate to use the furniture, phones and other equipment at no additional cost. It could be your ultimate turn-key opportunity. Example: An advertising firm recently needed to down-size, and secured new, smaller premise, fully fitted out with the use of the existing telephone system, the rental reflecting a cleared floor rate.
You don’t necessarily need to make a real estate commitment any sooner, but by very publicly engaging the market early in the process, you can maximise leverage with your existing landlord, and increase the chances of finding an ideal relocation opportunity.
Jones Lang LaSalle • Advantage Tenant
Ready, set, go. Diagnosing the opportunity
Your business objectives drive the right real estate solution, and define what “success” means relative to your real estate and occupancy goals. After identifying your objectives, we’ll review your current lease to understand your costs, rights and obligations. Then we’ll overlay our knowledge of market conditions, building-specific dynamics and other factors to quickly assess your opportunity: • Current vacancy in your building • Lease expirations in your building • Your current rent relative to the market • Your landlord’s debt structure • Your landlord’s investment goals • Relocation options
Those are just a few components we use to evaluate which strategies will work for you. It’s all part of a tool we call the Opportunity Diagnostic.
Jones Lang LaSalle • Advantage Tenant
Our quick-start assessment It starts with five short questions, and within 30 days we’ll deliver a game plan for you. We can do this with virtually no distraction to your daily routine.
What we’ll ask
What you’ll get
• What are your key objectives?
Specific recommendations:
(e.g., reduce rent, avoid capital outlay)
• What is your lease expiry? • What is your current rent? • Is your space the right size for your needs? • What is the ideal length for your new lease commitment?
• Whether it’s the right time for you to enter the market • The range of your potential savings • Which strategies will yield the most value for you • An implementable plan to achieve your goals
Reduce expenses. Improve productivity. Leverage the power of your tenancy. Today.
Jones Lang LaSalle • Advantage Tenant
Reduce expenses. Improve productivity. Leverage the power of your tenancy. Today. Our dedicated Tenant Representatives do more than just negotiate a good deal. They ensure that the transaction delivers an effective and efficient real estate strategy that is aligned to your business interests. Clients receive a single point of contact who is well versed in corporate real estate strategy, who has a access to the industry’s leading research and forecasting and who is compensated based on client satisfaction rather than the terms of the transaction. Our process is focussed on two common elements, building in flexibility and cost containment for our clients. In terms of flexibility we consider expansion, renewal, contraction, cancellation, sub-letting, pre-commencement rights and understand landlord restrictions to deliver an optimal outcome. In terms of cost savings we look for opportunities throughout the entire process to positively impact our clients’ bottom line. Our advice takes into account current market conditions, expected future market conditions as well as your business drivers to deliver a real estate solution that will last beyond today. At Jones Lang LaSalle we understand what tenants want and investors need from their real estate. Our diversified business model allows us to mediate better outcomes, facilitate smoother transactions, enable faster negotiations and build lasting relationships between tenants and landlords.
Jones Lang LaSalle • Advantage Tenant 11
www.joneslanglasalle.com.au
Jones Lang LaSalle Level 21, 600 Bourke Street Melbourne 3000 +61 3 9672 6666 www.joneslanglasalle.com.au
Michael Greene Regional Director Corporate Solutions +61 3 9672 6649 [email protected] George Brookes Associate Director Corporate Solutions +61 3 9672 6687 [email protected] Jonathan Hasset Associate Director Corporate Solutions +61 3 9672 6553 [email protected] Andrew Ballantyne Associate Director Research +61 3 9672 6554 [email protected]
COPYRIGHT © JONES LANG LASALLE 2009 All rights reserved. No part of this publication may be published without prior written permission from Jones Lang LaSalle. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor.
Market adversity creates real estate advantage The current economic climate is placing unprecedented pressure on businesses. Facing compressed revenue and margins, companies must reduce costs and remain competitive.
But these times also create significant opportunity. A dramatically changing Melbourne real estate market has become fertile ground for the well-prepared company to leverage its tenancy, reduce near-term costs and gain long-term competitive advantage through its real estate. Learn how companies are taking advantage of one of the most tenant-favourable markets in the past 15 years, and what you can do to position your company to benefit from the current environment.
Jones Lang LaSalle • Advantage Tenant
This is your opportunity • Reduce occupancy costs immediately
Tenant Leverage Index
• Lock-in low, stable long-term costs
Overall the Australian commercial property market has taken a huge swing in favour of the tenant over the last 12 to 18 months. Increasing levels of sublease space, de-centralisation and consolidation are driving vacancies up. Increasing vacancy rates are placing upward pressure on market incentives as tenants have more options to choose from. Increasing incentives are driving down gross effective rents, which in turn will drive down face rents once realistic ceiling levels have been reached. All of these factors make for a “tenant market” on the back of an extremely strong “landlord market” between 2004 and 2007.
• Avoid significant capital investment • Upgrade the quality of location, building or space • Negotiate increased flexibility to renew, expand or contract • Leverage a better deal to remain in current space
By analysing the relationship between the current forecast supply/ demand balance and the predicted growth in net effective rents1 over the same period, we have created the Tenant Leverage Index, using the latest forecast numbers from Jones Lang LaSalle Research. The current “tenant market” is expected to peak in mid to late 2010, and whilst the advantage will still remain with occupiers beyond that date, it will certainly start to move towards owners as market incentives start to decline, more demand returns to the market and vacancy rates start to compress. This will much reduce the leverage that an occupier has over a landlord when at the negotiating table beyond 2010.
Tenants’ Window of Opportunity: Tenant Leverage Index - Melbourne CBD 200
130
More Supply
100
120
50
110
0
100
-50
90
More Demand
-100
80
-150
Leverage Index
Indexed Supply/Demand
150
140
70
-200
60 Mar-08
Mar-09
Mar-10
Mar-11
Supply/Demand Balance
Mar-12
Mar-13
Tenant Leverage Index
Source: Jones Lang LaSalle, Research
Making real estate your competitive advantage Occupancy costs are typically a top-three expense, and the hardest to adjust quickly. Lease commitments often span numerous real estate cycles, locking in your costs irrespective of changes in economic conditions. But the game has changed and tenants are benefiting. Landlords want to retain quality tenants, and are more willing to recast a lease well in advance of expiration–or even to reduce rent in return for a longer commitment. Landlords seeking new tenants are also getting creative–removing impediments to tenant relocations using lease buyouts, increased lease concessions, large capital contributions or turn-key fit-outs.
1 Net Effective Rent = rent payable after market incentives (rent free period) but removes outgoings.
Jones Lang LaSalle • Advantage Tenant
Start now: time = advantage The market has changed – tenants have the upper hand
Why you should focus on your real estate now While the typical timeline to develop and implement a real estate strategy was 12 to 24 months, an increasingly tenant-favourable market has redefined the window of opportunity. By very publicly engaging the market early in the process, you can maximise leverage with your existing landlord, and increase the chances of finding an ideal relocation opportunity.
Only 12 months ago, landlords were in control. With strong rent growth expectations, few landlords would negotiate new transactions before a tenant’s lease expiration, preferring to wait as the market continued to rise. Vacant space was viewed as a landlord’s opportunity to create additional value. Today, the tables have turned. An unprecedented volume of space is coming back on the market. Rents have remained flat or have reduced and effective rents – after factoring in concessions for free rent and fit-out allowances – have declined by as much as 15%.
Timing the market means starting now You can’t perfectly time the market’s bottom, but you can leverage the market now by proactively evaluating all of your options without pressure to act. By starting early, you maintain control, and take action only when the opportunity meets your strategic, operating and financial objectives.
Engage while leverage is highest. Maximise your options. Act when you’re ready.
nc
ca Va
L e v e r a g e
y
Re
nt
Countdown to lease expiration
5
years
4
years
3
years
2
years
1
year
Lease expiration
Take advantage of a tenant-favourable window of opportunity and avoid a landlord-favourable market. With the dramatic drop in tenant demand, proactive landlords will renegotiate leases early and offer incentives to motivate new tenants to relocate or stay put for an extended term – covering large capital outlays for fit-outs or taking over a tenant’s remaining lease obligations. With these historic roadblocks eliminated, tenants with expirations even two to five years out are finding aggressive and creative landlords who are looking to make deals today.
Jones Lang LaSalle • Advantage Tenant
Why landlords will talk now The debt markets remain challenged, causing many owners concern about whether they will be able to refinance loans that mature in 2010, 2011 and 2012. This places a strong premium on maintaining stable property cash flows through high occupancy levels. The impact of capital markets forces
Anticipating a swift demand rebound
Because debt placement on commercial properties has tightened, landlords are increasingly motivated to attract and retain tenants. Owners don’t want to risk large vacancies in the foreseeable future. Those with low leverage have the financial flexibility to offer aggressive economic terms to lock-in quality tenants. Landlords with significant debt, and their lenders, need to protect investment value and secure cash flow. In either case, tenants reap the benefits.
The Melbourne CBD has entered the current downturn with vacancy below equilibrium for the market. This provides a unique opportunity for occupiers to reduce real estate costs. Unlike the 1990s recession, when the market was over-supplied (see table below), around 90% of new development is pre-committed and rising vacancy over the course of the next 18 months will be a symptom of increased sub-lease availability and backfill space. Jones Lang LaSalle expects vacancy to reach a cyclical peak in early 2011 at around 10% to 11%. Given the lower peak than previous cycles, and the severely controlled supply pipeline, the rebound in demand will result in a sharp tightening of vacancy rates. Even when supply does re-enter the market, stimulated by the demand increase, the time it takes to plan and build a new office building and the lack of finance readily available, means there will be a lag effect before space is available to occupiers.
Creditworthiness is still important to landlords, but they are increasingly looking beyond blue chip tenants to diversify their portfolio and manage sector risk. Quality tenants, regardless of size or industry, will attract interest from owners. Even in fully-occupied buildings, landlords are motivated to engage with stronger tenants to hedge their risk against weaker tenant defaults.
The effect of sublease space on market economics And there’s a new landlord in town competing for tenants – corporate Australia. Downsizing companies have placed a significant supply of sublease space on the market. Attractive pricing for these newly built and furnished subleases is creating downward pressure on market economics, forcing landlords with second-generation space to compete more aggressively for tenants. Sub-lease space currently constitutes 27.6% of the overall vacancy in the Melbourne CBD, or 66,100 sqm of space.
The elusive market trough Landlords and tenants alike are trying to pick the bottom of the cycle. Once landlords anticipate that the market is approaching a turning point, they will be less willing to negotiate – incentives will rapidly decrease, rental and fit-out concessions will be taken off the table and the pendulum will swing back into their favour.
Typically the Melbourne CBD has followed a four year cycle in a market downturn. In years one to two (2009 & 2010) downsizing and the disposal of excess space increases direct and sub-lease vacancy, providing a tenant favourable environment for lease negotiation or restructuring. In year three (2011) the green shoots of recovery result in the absorption of ‘soft vacancy’ within a portfolio, while the fourth year of the cycle has resulted in an absorption figure well in excess of long-term averages. An expected economic recovery in 2011 will be the catalyst for white collar employment growth and a strong demand rebound in 2012.
Strong Demand Typically Follows a Downturn 150
Melbourne CBD Office Market in Previous Downturns Development Pipeline (sqm)
% of Total Stock
Vacancy Peak
1982 Recession 1990 Recession 2001 Slowdown
4.1%
176,110
8.0%
7.8%
5.3%
789,175
29%
25.8%
7.5%
76,075
2.3%
10.2%
2009 “Recession”
5.2%
267,720
6.5%
TBD
Net Absorption (000s)
Vacancy Start of Downturn
100 50 0 -50
-100 -150
Source: Jones Lang LaSalle
Year 1 1990 to 1994
Year 2 2001 to 2004
Year 3
Year 4
2009 to 2012
Source: Jones Lang LaSalle, Research
Jones Lang LaSalle • Advantage Tenant
How to extract value today Early renewal
Relocate with your current landlord
• Reduce costs now
• Reduce costs now
• Secure long-term advantage
• Eliminate subleasing risks
How it works
• Relocate at minimal cost
If your rent is above market, a smart strategy is to reduce today’s rent to market rates–typically a decrease of 15-20%–in return for an early commitment to extend the term of your lease. This “blend and extend” strategy allows you to immediately reduce real estate costs. Your landlord avoids the significant cost and risk of finding a replacement tenant. This also stabilises cash flow, an important factor for property refinancing. Early renewals may also involve the give-back of surplus space, providing you another option to immediately reduce costs. Example: A media and communications group went to the market and their existing landlord 2.5 years before their lease expiry. Jones Lang LaSalle assisted with the review of alternatives and negotiated a new term in the existing premises reflecting a 17% rental reduction, a large incentive and significant upgrade works to be undertaken by the landlord.
Use concessions to bridge the gap
How it works A motivated landlord might be in a unique position to offer a lower cost space alternative within your current building, or within another property in their portfolio. Similar to an early renewal, you may benefit from a rent reduction of 15-20% in return for an early commitment to extend the term of your lease. You may also have an opportunity to give-back surplus space, enhancing your potential savings. Example: A telecommunications company wanted to relocate to a design and construct premises that reflected their new way of working. Jones Lang LaSalle negotiated a deal with a developer, with the existing owner purchasing the development to facilitate holdover until completion. The new lease with the existing landlord allowed for greater flexibility for expansion and contraction.
Lease takeover
• Relocate at minimal cost
• Eliminate subleasing risks
• Eliminate subleasing risks
• Secure long-term advantage
How it works
How it works
In some cases a lease takeover may not be feasible, and landlords use other incentives to help you make a move in this extremely capital constrained environment. Landlords may offer extended free rent periods (12+ months), funds to fit-out your new space, and other concessions that enable you to transition into new space without the burden of a large capital outlay.
If your lease still has some time to run, there are challenges to relocating. There are risks associated with finding a sublease tenant for your existing space, plus carrying costs for two locations until you do.
Concession packages are structured to respond to your particular situation. For instance, an 18-month free rent period may be negotiated in one case to bridge an existing lease obligation, while a fit-out allowance of $800 to $1,200 per square metre may be granted in another case to overcome capital challenges. Example: A financial services company with 12 months remaining on their lease negotiated and achieved a 12 month rent-free period on a five year lease and a fit-out at the landlord’s cost.
Jones Lang LaSalle • Advantage Tenant
Today, a new landlord may be willing to assume, or takeover, your current lease obligation. You transfer the risk and cost to the new landlord in exchange for your commitment to relocate and sign a long-term lease. Example: A legal firm occupying 20,000 sqm with a lease expiry in late 2013 have committed to a new building in the CBD to complete in 2012. The new owners are picking up the lease tail and providing a new fit-out for the tenant.
Whether your lease expiration is in nine months or five years, you can benefit from today’s tenant-favourable market. Tenants who understand their occupancy requirements, value proposition, and prospective landlord’s motivations can extract long-term value using one or more of these strategies.
Trade-up
Turn-key option
• Secure a more desirable location/building
• Eliminate capital costs
• Upgrade the quality of your space
• Get brand new construction
How it works
• Customise your space
The significant rise in rental rates between 2004 and 2008 priced many organisations out of their preferred locations. To contain costs, companies with expiring leases made hard decisions about moving to less favourable locations. This disrupted employee commuting patterns, created a recruiting and retention disadvantage, and moved them away from clients. With the steep decline in occupancy costs, it’s no longer cost prohibitive to remain in place. And, you have opportunities to move to a more central location, or upgrade to a better quality building with amenities that are important to employees and more attractive to clients and prospects. In today’s market, you can use your real estate to upgrade your brand and your franchise, without necessarily increasing costs. Example: Jones Lang LaSalle acted for a legal firm who moved from a fringe location in the CBD to the prime core at a lower annual cost than their current premises locked in for 10 years.
How it works Capital constraints are a primary barrier to relocation. To address this impediment, a landlord whose cost basis allows additional investment in a property may fund a full fit-out of new space for an incoming tenant. In prior cycles, landlords had a typical fit-out allowance concession–for example, $500 per square metre. If the landlord invested $850 per square metre into the space, he would finance the additional $350 per square metre with a higher rental rate for you, the tenant. What has changed? Now landlords are betting that a good fitout will be reusable by the tenant after you. Example: An IT company received a good quality fit-out for a three year lease across 1,200 sqm. The landlord made the investment on the assumption that the tenant will extend their lease or the space would suit new tenants that they could attract into the building.
Take a fitted-out sublease • Eliminate capital costs • Benefit from a high quality fit-out • Reduce overall occupancy costs How it works Some of the best space on the market was built within the last six to 24 months, but is now sitting vacant because organisations have downsized. These surplus leases are liabilities, and many companies are looking solely to recover a portion of their committed cost–not to make a profit as an owner/operator of real estate would. If the space is right for you, you get a bargain rent, take advantage of the existing fit-out, and in many cases can negotiate to use the furniture, phones and other equipment at no additional cost. It could be your ultimate turn-key opportunity. Example: An advertising firm recently needed to down-size, and secured new, smaller premise, fully fitted out with the use of the existing telephone system, the rental reflecting a cleared floor rate.
You don’t necessarily need to make a real estate commitment any sooner, but by very publicly engaging the market early in the process, you can maximise leverage with your existing landlord, and increase the chances of finding an ideal relocation opportunity.
Jones Lang LaSalle • Advantage Tenant
Ready, set, go. Diagnosing the opportunity
Your business objectives drive the right real estate solution, and define what “success” means relative to your real estate and occupancy goals. After identifying your objectives, we’ll review your current lease to understand your costs, rights and obligations. Then we’ll overlay our knowledge of market conditions, building-specific dynamics and other factors to quickly assess your opportunity: • Current vacancy in your building • Lease expirations in your building • Your current rent relative to the market • Your landlord’s debt structure • Your landlord’s investment goals • Relocation options
Those are just a few components we use to evaluate which strategies will work for you. It’s all part of a tool we call the Opportunity Diagnostic.
Jones Lang LaSalle • Advantage Tenant
Our quick-start assessment It starts with five short questions, and within 30 days we’ll deliver a game plan for you. We can do this with virtually no distraction to your daily routine.
What we’ll ask
What you’ll get
• What are your key objectives?
Specific recommendations:
(e.g., reduce rent, avoid capital outlay)
• What is your lease expiry? • What is your current rent? • Is your space the right size for your needs? • What is the ideal length for your new lease commitment?
• Whether it’s the right time for you to enter the market • The range of your potential savings • Which strategies will yield the most value for you • An implementable plan to achieve your goals
Reduce expenses. Improve productivity. Leverage the power of your tenancy. Today.
Jones Lang LaSalle • Advantage Tenant
Reduce expenses. Improve productivity. Leverage the power of your tenancy. Today. Our dedicated Tenant Representatives do more than just negotiate a good deal. They ensure that the transaction delivers an effective and efficient real estate strategy that is aligned to your business interests. Clients receive a single point of contact who is well versed in corporate real estate strategy, who has a access to the industry’s leading research and forecasting and who is compensated based on client satisfaction rather than the terms of the transaction. Our process is focussed on two common elements, building in flexibility and cost containment for our clients. In terms of flexibility we consider expansion, renewal, contraction, cancellation, sub-letting, pre-commencement rights and understand landlord restrictions to deliver an optimal outcome. In terms of cost savings we look for opportunities throughout the entire process to positively impact our clients’ bottom line. Our advice takes into account current market conditions, expected future market conditions as well as your business drivers to deliver a real estate solution that will last beyond today. At Jones Lang LaSalle we understand what tenants want and investors need from their real estate. Our diversified business model allows us to mediate better outcomes, facilitate smoother transactions, enable faster negotiations and build lasting relationships between tenants and landlords.
Jones Lang LaSalle • Advantage Tenant 11
www.joneslanglasalle.com.au
Jones Lang LaSalle Level 21, 600 Bourke Street Melbourne 3000 +61 3 9672 6666 www.joneslanglasalle.com.au
Michael Greene Regional Director Corporate Solutions +61 3 9672 6649 [email protected] George Brookes Associate Director Corporate Solutions +61 3 9672 6687 [email protected] Jonathan Hasset Associate Director Corporate Solutions +61 3 9672 6553 [email protected] Andrew Ballantyne Associate Director Research +61 3 9672 6554 [email protected]
COPYRIGHT © JONES LANG LASALLE 2009 All rights reserved. No part of this publication may be published without prior written permission from Jones Lang LaSalle. The information in this publication should be regarded solely as a general guide. Whilst care has been taken in its preparation no representation is made or responsibility accepted for the accuracy of the whole or any part. We stress that forecasting is a problematical exercise which at best should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forward projections involves assumptions regarding numerous variables which are acutely sensitive to changing conditions, variations in any one of which may significantly affect the outcome, and we draw your attention to this factor.
