The Paradox of Brisbane’s Commercial Real Estate: High Vacancy, High Incentives

Despite Brisbane’s commercial vacancy rates showing a healthy decline, tenant incentives remain historically high. This paradox has left many building owners scratching their heads, wondering why incentives haven’t decreased in tandem with vacancy rates. To understand this phenomenon, we need to delve into the underlying factors that sustain this high rent, high incentive market and explore why more landlords are shifting towards management models that generate immediate cash flow.

Historical Context and Current Trends

Incentives in Brisbane’s CBD have long been a staple in the commercial real estate market. Decades ago, luxury cars were offered to entice businesses into new developments. Although such extravagant incentives have been replaced by more conventional offerings, the principle remains the same: landlords use incentives as a primary tool to attract tenants.

Historically, there was a strong correlation between vacancy rates and incentive levels. However, since 2015, this relationship has weakened. Even as vacancy rates began to taper off in 2023, incentives remained at all-time highs. This trend was exacerbated by the COVID-19 pandemic, which forced landlords to push the upper limits of incentives to secure income in a challenging environment.

The Fit-Out Factor

One of the primary reasons incentives remain high is the increasing importance of fit-outs in leasing transactions. Modern tenants expect a vibrant, well-fitted workplace, and most lack the expertise or capital to carry out successful fit-outs themselves. Consequently, landlords offering quality fit-out spaces as part of their incentive packages have a significant advantage.

Recent reports suggested fitted premises accounted for 89% of all leasing transactions since 2017. This trend is likely to continue as fit-out costs rise alongside overall construction costs. To mitigate these expenses, landlords are designing fit-outs that last longer and require minimal maintenance. However, the strong demand for fitted premises means that tenants are often willing to hold out for incentives that cover these costs, keeping incentive levels high.

The Role of Tenant Representatives

Another factor contributing to sustained high incentives is the proliferation of tenant representatives (TRs). Traditionally, major corporations engaged TRs to procure office space, with fees paid by the tenant. Recently, however, TR briefs have inundated the market from businesses of all sizes, with fees often now payable by the landlord. This has created an ultra-competitive environment where landlords compete against unknown alternatives on rents and incentives, often pushing deals larger than expected.

The Shift Towards Management Models

Given the persistent high incentives, more commercial landlords are exploring management models that generate immediate cash flow. These models offer several benefits over traditional leases, which often come with rent-free periods and other tenant incentives.

1. Immediate Revenue Generation: Management models allow landlords to start generating revenue immediately, without the lag associated with traditional leases. This is particularly advantageous in a high-incentive market where upfront costs can be substantial.
2. Flexibility and Control: These models provide landlords with greater flexibility and control over their properties. They can adjust rental terms and conditions more dynamically in response to market changes, ensuring a steady income stream.
3. Reduced Risk: Management models help landlords minimize risks tied to long-term vacancies and high tenant turnover, providing a more stable and predictable cash flow. This is especially important given the recent 36.2% increase in business liquidations in Australia last year.

Looking Ahead

While Brisbane’s vacancy rates are trending downwards, the high rent, high incentive market is likely to persist as long as vacancy remains above the 5% threshold. Landlords hoping for a significant reduction in incentives may need to wait until vacancy rates drop further. In the meantime, the shift towards management models offers a viable alternative for those seeking immediate cash flow and reduced risk.

In conclusion, the commercial real estate market in Brisbane is at a crossroads. While vacancy rates are improving, the entrenched high incentives reflect the evolving demands of tenants and the competitive landscape shaped by tenant representatives. As landlords navigate this complex environment, those who adapt by embracing management models may find themselves better positioned for long-term success.