Options for tenants and business experiencing a shift in spatial demand.
Written by Nick Greenwell, National Director, Industrial Occupier Services
For most business leaders, the thought of locking yourself into a 10-year lease, 7-year lease or even 5-year lease can be daunting, and rightly so. Many businesses find it challenging to forecast where they’ll be in three years’ time, so determining your spatial needs over the long-term can be difficult; particularly within such a disruptive economy as technologies and automation continue to advance at a rapid rate.
It’s not uncommon to hear of tenant’s who have encountered a shift in spatial demand well before their lease is due to expire. Whether that be running out of space or having too much space. For contract reliant businesses, such as 3PL providers, landing or losing a contract can mean a significant shift in the amount of space required. The same can be said for industries projected to experience exponential growth in the coming years, such as eCommerce in which Deloitte Access Economics has forecasted that Australia’s share of online retail sales has the potential to increase three-fold to $37.8B in 2025, all of which will place a huge strain on eCommerce businesses.
Given shifts in spatial demand are not uncommon, what are your options if your facility no longer meets the needs of your business and there are still several years left on your lease?
Here are five options to consider:
1. Move with your existing landlord into a purpose-built facility
Most major landlords will relish the opportunity to shift you elsewhere within their portfolio, taking the view that if your business is growing, their portfolio is too. If they have no existing options available, but have access to developable land, some landlords will build tenants a purpose-built facility, providing a market incentive and absorbing any existing lease tail/make good obligations to prevent you taking your requirement to the broader market. In our experience as occupier representatives, it is critical to run a market process to provide you with alternate options and create greater leverage with your existing landlord.
Tenants should allow 18 - 24 months for the process of securing a new purpose-built facility and running a market process, so considering this timeframe within your plans to move out prior to your lease expiry is important.
2. Design and negotiate with expansion in mind
For businesses who have outgrown their previous facility and are still projecting strong growth, having the ability to call on expansion space when needed proves beneficial. Often developers will use a partial pre-commitment to speculatively build the balance of the facility, as it’s cheaper to build a facility all at once.
This option can provide a good opportunity to negotiate with the developer on one of the following;
A first and/or last right of refusal over the expansion space or;
A rent-free period over the expansion space until a predetermined future date after which you will commence paying rent
Similarly, if the developer doesn’t build the facility at once, the tenant may be able to negotiate a ‘land rent’ over the expansion land allowing the tenant to commence construction on the expansion space when it is required. A good example of this was the staged delivery of GMK Logistics new facility at Smeaton Grange with Vaughan Constructions. (Click here).
3. Sublease existing premises and source a new facility to meet your growing demands
Tenants who don’t want to stay with their current landlord will most likely need to consider a sublease of their existing premises. This means running a market process for a new facility (either purpose-built or existing) that will drive competition and create opportunity to negotiate a more favourable deal than the existing premise. In particular, Sydney and Brisbane currently offer tenants very attractive prelease opportunities as developers compete to develop out their estates and grow funds under management.
In our experience, tenants and occupiers should allow 3-6 months to backfill their current facility; however, some lease agreements will require the Head-Lessee to maintain their bank guarantee to sub-lease, so be sure to seek expert advice when undertaking any sub lease negotiations.
4. For tenants with too much space, consider subleasing space
Tenants who find themselves with excess space have limited options, but subleasing space is a certain way to reduce exposure. With vacancy levels at an all-time low and the continual shift in businesses spatial demand, we have witnessed a growing demand for flexible short-term leasing opportunities over the past 18 months. Seasonal businesses such as Chrisco Hampers or Fresh produce growers always require flexible leasing opportunities and in today’s tightly held market, these types of businesses are often ‘price takers’ as they have limited options to get them through the peak season.
Unforeseen business disruptions also provide an opportunity to sub-lease space. Perhaps the best example of this was during the 2011 Brisbane floods where there was a run of short-term lease activity to help businesses get back on their feet. A more recent example is the ‘strawberries needle contamination’ saga, where we have recently secured short-term accommodation for an affected business who is now required to x-ray and double check all outbound inventory.
5. Consider a short-term option to ride out the lease
Whilst limited, there are still short-term options available. These can be difficult to find but anomalies in certain markets can create short-term opportunities.
Take Sydney for example, the rezoning of industrial land for high-rise apartment living (i.e. Homebush, Rhodes, Rydalmere) has seen key industrial sites being purchased for redevelopment. However, with the cooling residential market many of these projects have been shelved until the next cycle (typically 7-8 years) resulting in short-term leasing opportunities. Be mindful however, as the level of service from these landlords can be inferior in terms of general maintenance and the facilities overall presentation.
If your business foresees a shift in spatial demand before the end of your lease term or you’re considering a new purpose-built facility, now is a great time to assess your future spatial needs as many parts of Australia (particularly along the east coast) are experiencing tenant favourable conditions.
As the industrial market has become far more sophisticated, using an industrial occupier advisor to represent your best interests in the market will prove invaluable. If you would like to discuss any of the above options in more detail, feel free to get in touch with me via the contact details below:
Nick.firstname.lastname@example.org // +61 421 948 800