You love your current office space but everywhere you turn, you’re hearing stories of how soft the office leasing market is in Perth. There are signboards all over the place and the super deals tenants are securing are approaching levels reserved for urban myths of old. You start getting excited because you can see yourself halving your rental expense overnight. And then you pull out your lease and your face drops; you’ve still got a few years left on your term.
The thing is, even if your lease expires in 2019, for example, you can still take advantage of the current market conditions.
The reason for this apparent paradox is that you can create a win-win outcome for both yourself and your landlord when you understand the factors that motivate them in the current market.
The first is that it costs the landlord more to find a new tenant than it does to keep you. This is because there is invariably a period during which a property remains vacant and this represents lost income for the landlord and additional expenses because they have to pay the building outgoings out of their own pocket. If that wasn’t bad enough for them, they also have to allow for generous incentives to lure new tenants and then pay the leasing agent’s fees on top. It can really add up, especially in the current market.
The second factor involves the outlook for the office leasing market in the medium term and whether your lease will expire in a stronger or softer market. If your lease expires during a period where everyone expects the market to be stronger then there is no motivation for your landlord to do anything now, because they’ll be able to get a better deal in a couple of years. But if your expiry is due to occur in a stagnant or softer market (the current consensus view for the next couple of years) then it’s in the landlord’s interest to do a deal now to protect themselves from this risk. In essence, the question here is whether the soft leasing market is projected past your lease expiry.
The third factor has to do with the impact of your lease term on the building’s Weighted Average Lease Expiry (WALE) which is a significant metric in the valuation of the property. The longer your unexpired term and the larger your floor area, the larger the impact you have on the building’s WALE and, by extension, on the building’s value. A healthy WALE that gets over the current softness is a good thing in an investment property and if you can contribute to this then your landlord will want to hear from you.
It all comes down to the numbers; if you can propose a solution that addresses the combined impact of the above factors then you are making things interesting for the landlord. At the same time, the proposal has to make sense for you too in terms of your business plan and growth prospects. If your solution ticks both boxes then you have a marriage made in heaven.
If you want a sanity check of your numbers – or just want to talk about the market – give me a call on 9261 6698 or email me at theo.smyrniotis@colliers.com
Alternatively, contact Rick Maggi on 9382 8885 or rickmaggi@westmount.com.au.