Happy tenant, happy landlord is the ultimate scenario – so how are leases being structured and what’s happening to rental rates for commercial and industrial property?

The last nine months has seen minimal rental growth and, in some cases, some backward movement, across most sectors according to Carl Waalkens, director Bayleys Valuations.

“Specifically, there have been few landlord-initiated rent reviews across retail and office premises as the potential for growth remains low due to increasing vacancies and a preference by occupiers to control costs by reducing their real estate footprint.

“While the rate of rental growth in the industrial sector may have slowed from the highs of 2022 and early 2023, given the time period between market review dates, most landlords continue to achieve significant rental increases.”

When issued with a rent review notice, Waalkens advises occupiers to consult with qualified professionals to drive positive outcomes – and the earlier, the better.

“By allowing adequate time to get market-relevant information, occupiers, as well as landlords, will be able to establish a defendable immediate position as well as forecast settlement options so that increases (or decreases) can be planned for.”

Should any contention arise, Waalkens says most leases prescribe the need to engage a valuer during the dispute process, and engaging an experienced valuer is key.

“Valuers offer an independent assessment to help with a swift and smooth negotiation. Specialist valuers can also add value by acting as expert witnesses, particularly during an arbitration or mediation process where positions may require defending under cross-examination.”

Desk report

In the office sector, Bayleys national director office leasing Matt Lamb says the current economic climate is supporting fixed annual increases of 3-percent.

“Landlords would generally like to see a higher percentage than that, but that’s the threshold we’re seeing. Both occupiers and landlords have veered away from CPI-linked movement because of economic volatility.

“Most leases also contain reviews to market either at lease renewal time for shorter-term leases, or at the mid-point of a longer lease.”

On the subject of lease terms, Lamb says six years used to be the norm for large corporates, but that’s pushed out to 10-15 years now.

“In these instances, market rent reviews will have a cap and collar mechanism to ensure that rent movement is not extreme in either direction.”

“Due to the competition between sublease and direct lease options, we are seeing a diverse range of incentive levels being offered, either as rent-free periods and/or capital expenditure towards fit-out or turn-key.

“The degree of incentive and structure will largely depend on the quality of the asset and its situation. For example, sublease spaces are often already furnished, making it more likely to see the incentive based on the use of the space and a rent-free period. In contrast, new direct lease may require a fit-out, leading tenants to seek landlord capital contribution towards fit-out.”

Industrial flexibility

Bayleys national director industrial and logistics Scott Campbell says rents have plateaued around the country and will find their new market level as 2024 progresses with some movement upwards still expected as rental rates are reviewed on renewal.

“Given weaker business sentiment, any rental increases are likely to be more subdued and normalised with landlords and occupiers moving away from CPI volatility and generally opting for fixed annual increases.”

Campbell says while vacancy rates remain low in historic terms, there are some signs that the industrial market could be softening after an extended period of extremely tight fundamentals.

“Inventory for lease has increased, with sublease opportunities becoming available. “This has taken some of the pressure out of the leasing market for occupiers, however, landlords are not generally needing to factor in incentives at this stage.

“Sub-lessors don’t tend to offer incentives, but we’ll be watching how that segment of the market plays out as more sublease space becomes available.”

Landlords are recognising the need to work more closely with occupiers, with some flexibility being incorporated such as start dates aligning with lease expiry dates.

Retail detail

Bayleys national director retail, Chris Beasleigh says in the current fairly volatile retail market, there’s no “one-size-fits-all” template for lease deals.

“While we’re not seeing landlords desperate to take the first tenant that comes along, there’s a lot up for negotiation and deals are being done.

“We’re seeing a higher degree of flexibility around lease terms and structures with the aim being to reach a deal that works for all parties, and more open communication between landlords and tenants with give and take on both sides.

“No landlord wants a high churn given re-leasing costs like agents’ fees, marketing charges and legal costs.”

Beasleigh says tenants could expect better incentives for leases of more than 5-6 years – be that a rent-free period, landlord-initiated fit-out work, or a contribution towards tenant fit-out.

He says most retail leases today have a mix of fixed annual increases and to-market reviews at renewal or, for longer leases, at the mid-point, while some tenants are opting for turnover-linked rents, paying a base rate and then a percentage of turnover on top.