Many businesses are feeling the bite of rising costs and economic uncertainty with the latest quarterly estimates from the Australian Bureau of Statistics showing company profits down by 2.5% to March 2024.
But it’s not all doom and gloom. With business budgets stretched, there are smart strategies you can apply to make the most of these challenging times.
If you’re leasing commercial space, decreasing rental overheads can ease the pressure over the longer term. Looking closely at your current lease agreement is a good place to start. And when your lease is up for renewal, relocating your business can be a great way forward if you choose the right space.
While premium and A-Grade commercial properties are attracting more attention, savvy business owners will know B-Grade (and lower) buildings are substantially less in demand, which presents an exciting opportunity for tenants.
Our latest market snapshot lists Melbourne’s prime and A-Grade vacancy rates at 11.2% and 17.3%, respectively, while B-Grade commercial vacancy sit sat 22.3% for the same period.
In Sydney, vacancy rates are also on the rise with B-Grade stock the hardest hit, jumping from 10.6% in Q4 2022 to 12.4% in Q2 2024. And with 407,000 sqm of new stock expected to come online by 2027, B-Grade property owners are feeling the heat.
Lower grade buildings, which are vacant (or substantially underutilised), incur ongoing costs for owners. On top of lost rent, outgoings such as annual rates, insurance premiums, maintenance costs and energy bills continue to mount up, putting pressure on landlords to offer more favourable lease terms to attract a new tenant. So, B-Grade space can be the perfect option if you’re looking to secure a cracker deal on your next commercial lease.
There are several factors at play here, including:
In the post-pandemic world, companies have reduced their office space by an average of 20% in response to changing work patterns and a move towards remote work.
While effective rent has been increasing in Premium an A-Grade properties, incentives remain elevated at c. 35%, making these spaces more affordable for companies looking to attract staff back into the office.
ESG (environmental, social, and governance) goals reflect businesses’ commitment to achieving greater sustainability and energy efficiency throughout their operations. In pursuit of a stronger NABERs rating, more tenants are gravitating towards premium or A-Grade space designed to meet more stringent ‘green’ credentials.
To attract tenants to their B-Grade buildings, property owners are currently doing one of the following:
Landlords offering their B-Grade space for rent in its current condition can be a great opportunity for cost-conscious tenants. These spaces typically offer competitive face rents, making them more affordable.
Landlords may also be more willing to negotiate to secure a great tenant. So, tenants are well placed to secure higher incentives or more flexible terms, such as shorter leases and break clauses.
This is where landlords invest capital upfront to give their spaces a fresh, modern facelift to enhance the property's appeal. Renovated B-Grade buildings often feature A-Grade amenities, such as upgraded lifts, stylish foyers, and end-of-trip facilities.
This can be particularly advantageous for tenants who are looking to access high-quality amenities at B-Grade prices, offering a great balance between cost and quality.
This longer-term investment strategy involves demolition of B-Grade (or lower) stock, then rebuilding on the existing site. Although strictly not a B-Grade option, for tenants, new developments can be a promising prospect as tenants can often lock in a better deal if they’re among the first to commit to the new project. For example, early commitment can lead to advantageous lease terms, customised fit-outs, and other incentives designed to attract anchor tenants.
B-Grade property can include interesting spaces with a variety of past purposes, for example, old warehouses or industrial buildings, with owners converting these unique structures into trendy office space.
If you’re looking for a creative space to reflect your business, a unique office aesthetic can enhance your brand, and is usually comparatively cost-effective. These properties are typically located on the city fringe, often meaning lower face rents compared to other CBD alternatives.
While the lure of lower rents is a great motivator, you need to be sure the space is a good fit for your business.
It’s important to weigh up potential rental savings against relocation and establishment costs. And to ensure the building amenities and new location will suit your staff and client needs.
When leasing any space – location, location, location – is always key. Saving on your commercial lease is one thing, dragging your business into a dreaded city ‘dead zone’ is another.
Look for B-Grade buildings positioned to enjoy a bustling city vibe, with good transport access, and the right mix of amenities to retain talented staff and keep your ideal clients coming back.
Your Perfect Plan B
If you’re looking to lock in a great deal for your next commercial lease, the market is primed for negotiation. That’s where using a professional tenant rep comes in – we know exactly how hard to push, what to negotiate, and where (and which) landlords are feeling the pinch.
Contact us to find out how we can help you.
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