For office landlords, the hits keep coming. And, with a new year on the horizon, businesses are poised to negotiate even better deals.
Here's why 2025 will bring more reasons for tenants to celebrate:
A speculative fit-out (a.k.a. 'spec fit-out') is a new fit-out, generically designed to accommodate a range of prospective tenants and give the advertised property an edge over the competition. They’re paid for by the landlord, built before any tenant commits, and have been increasingly rolled out.
For tenants, the appeal of a spec lies in mitigated risks around construction costs, supply chain challenges and the promise of a turnkey move. However, these fit-outs often come with a significant trade-off: they're not purpose-built to meet a tenant's specific business requirements, often requiring additional customisation or compromises.
Over the last few years, the spec fit-out itself has been offered as the primary lease incentive. But with high vacancy rates and growing competition from turnkey sublease spaces and refurbished suites at lower price points, many spec tenancies are sitting empty for extended periods. Unsurprisingly, landlords are offering increasingly generous incentives to fill these spaces, with some tenants receiving a full incentive on top.
Landlords aren’t enforcing physical makegoods right now because they need tenancies to be fitted and furnished to have any chance of re-leasing them.
But don’t be fooled—if your lease includes a makegood clause, your landlord will still use it. However, instead of requiring you to knock down walls, they’ll likely offer you a slightly discounted payout—perhaps 10% off—and then lease the space as-is, pocketing the difference.
Traditionally, make good clauses required tenants to restore leased premises to their original condition at the end of the lease term, resulting in significant costs. But tenants are starting to catch on.
Couple these ‘slush funds’ with the dominant position that spec suites don’t need to be made good, and this spells the death of the makegood (until the market gets stronger for landlords again).
One emerging trend we're seeing is the capping of makegood liabilities, now often referred to as "refresh fees" (which typically range from $70 to $150 per sqm). This approach offers tenants greater certainty over end-of-lease costs and prevents landlords from using these clauses to offset other expenses.
Ok, we’ve been saying this for a while now, and it’s yet to come to fruition. But with property values destined to continue their downward trend in 2025, rents simply have to go down.
Somewhat counterintuitively, for the last three years, landlords have increased face rents to artificially prop up the perceived value of their assets. In Sydney, for example, face rents for some new premium buildings now range from $1,700 to $2,400 per sqm, with average face rents in both Melbourne and Sydney increasing by more than 15% over the last five years.
While these headline rents may create the impression of a thriving market, behind the scenes, incentives have to continue their upward trajectory to keep effective rents attractive and competitive.
This dual strategy creates a balancing act for landlords, allowing them to safeguard their property values while ensuring they can still attract good occupiers. But, for tenants, it presents a unique opportunity to capitalise on higher incentives.
As property valuations continue to fall, this dynamic will likely shape leasing negotiations in 2025, with tenants increasingly leveraging high vacancy rates to lock in better deals.
Over the past few years, we saw a notable rise in relocations as tenants sought to capitalise on tenant-friendly conditions and "right-size" their premises.
However, with in-office requirements now firmly established and greater clarity around space requirements, 2025 will likely see an increase in lease renewals (provided landlords are willing to play ball).
Renewing an existing lease is an attractive option for tenants because it eliminates the cost and logistical challenges of relocation. However, to make renewals truly appealing, landlords must treat these agreements with the same budgets reserved for attracting new tenants. And to ensure landlords do approach it this way, tenants need to be prepared to move, despite any operational hurdles.
To maintain leverage, tenants should avoid the pitfall of exercising their options, as options strip away the competitive tension that drives landlords to offer more favourable terms. Tenants who approach renewals strategically—by expressing interest in other office spaces and creating competition—can secure renewal deals that match or exceed those typically offered to incoming tenants.
The recent surge in demand for warehouse space, fuelled by supply chain disruptions and "just-in-case" inventory strategies, has subsided. Retailers, now more focused on efficient inventory management, are winding down excess stock, leading to reduced demand.
This shift is expected to create opportunities for tenants as landlords face challenges leasing vacant properties unless priced competitively. Tim Green, Managing Director at Tenant CS, explains, "While there will likely be a steady flow of renewals, vacant spaces will be harder to move, and landlords will need to offer stronger incentives to attract new tenants."
As famous economist John Kenneth Galbraith once said, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
The office market can only strengthen for landlords, so now is the time to lock in today's rates before the market shifts again.
However, even in a tenant's market, lease negotiations are complex, and there are many factors to consider to secure the most favourable terms — it's about more than just incentives and rent.
At Tenant CS, we specialise in developing and executing commercial lease negotiation strategies on behalf of tenants—not landlords.
If you have an expiry in 2025 or 2026, don't leave money on the table. Contact our team to ensure you make the best move for your business.
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