03 CHANGING OCCUPIER BEHAVIOUR
CUSHMAN & WAKEFIELD | 18
AUSTRALIA'S OCCUPIER MARKET OUTLOOK
MAINTAINING THE COST BASE IS KEY For many occupiers, the starting point for a relocation is simple: avoid materially increasing the existing occupancy cost base.
HOW OCCUPIERS ARE MAINTAINING THEIR COST BASE
As occupiers approach lease expiry, relocation decisions are increasingly being assessed through the lens of cost neutrality. While a new facility may carry a higher face rent, occupiers are increasingly seeking deal structures that keep occupancy costs broadly aligned with their existing facility during the initial years of the lease. This is placing greater emphasis on how incentives are structured, not simply the headline amount. Front-loaded rent abatement can offset the initial rental increase, providing occupiers with time to transition into the higher cost base and realise the operational benefits of the new facility. With renewal rates above 90% in many locations, the biggest competitor to a new facility is often the occupier's existing building. Deal structures that minimise the initial cost increase can therefore play an important role in making relocation viable.
Front-loaded incentive structures
Rightsizing facility requirements
Lease term optimisation
Concentrating rent abatement in the initial years can minimise the cost increase during the transition period.
A smaller or better-configured footprint can contain the total rental commitment even where the new facility carries a higher rental rate.
Longer terms and phased rental commencement can provide greater flexibility to align occupancy costs with the occupier's transition and payback period.
Same incentive. Lower initial occupancy cost. Illustrative net effective rent ($/sqm) under evenly spread and front-loaded incentive structures
Why it matters
• Protects margins during the initial transition period. • Makes relocation more viable without increasing the headline incentive. • Aligns the incentive with when cost pressure is greatest.
$100 $105 $110 $115
$112 $112 $112
$105 $105 $105 $105 $105
$100
$80 $85 $90 $95
$95
$95
Current Y1
Y2
Y3 Y4 Y5
Y1
Y2
Y3 Y4 Y5
Current facility
Evenly spread incentive
Front-loaded incentive
Assumptions: 10,000 sqm facility in Melbourne's West; $145/sqm net face rent; 27.5% incentive. Front-loaded structure is based on 60% being taken as an abatement in years 1 and 2 and the balance spread over the remaining term.
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