Thursday 02 February 2023

Fitted vs Unfitted - The Great Debate

Is it necessary for a vacant office tenancy to have a fit-out in place to attract a tenant?

With our recent success in fully leasing 733 Ann Street, Fortitude Valley, it has reignited the conversation in our office about leasing strategies for unfitted office stock.

A Case Study - 733 Ann Street, Fortitude Valley

The building at 733 Ann Street was on the market for some time with numerous agents. Our team received instructions from the landlord to lease the space as is, no fit-out, low incentive and with a demolition clause. On the plus side, the tenancies had great exposure and parking.

It was a difficult brief that was made even more difficult due to increased competition in the area with the likes of Consolidated Properties’ 15 storey office tower at 895 Ann Street; Lendlease’s A-grade, fully fitted-out 2 Kings Street; and JGL Property’s iconic redevelopment of Jubilee Place. What made it even more difficult was that all of these developments are offering full fit-outs, generous incentives, rooftop terraces, high quality staff amenities, and promising “biophilic design” (biophilic design is an approach to architecture that seeks to connect building occupants more closely to nature).

Our Leasing Team worked together to lease both of the tenancies and are proud to have recently handed over the keys to two different tenants, each taking circa 500 sqm over 2 floors. The deals were transacted prior to the end of 2022, and 733 Ann Street is now home to Poundit Boxing Gym and Buildcert Private Building Certifiers. Both deals were negotiated on the basis of no fit-out being offered to the tenant and low incentive levels, with a rent that was in line with the offering and the market. 

After the campaign, there was a lot of talk amongst our team about the office leasing market, the use of artificial incentives to inflate property values, and whether there is value in a landlord spending considerable sums on a spec fit-out before they even have a tenant secured. 

Our team have first-hand experience leasing every type of asset class in the commercial sector, including retail, industrial, and office - both fitted and unfitted, and here’s what they have to say about the challenges of office leasing in today's environment:

Kyle Britto, Leasing Executive:

"Although most agents push for landlords to fit-out offices for quick and aggressive results, sometimes it's beneficial for a landlord to leave the property unfitted. It may take longer to lease, but depending on your situation, this may be the optimal leasing strategy.

Leaving a space unfitted does expose a Landlord to low offers due to capital requirements for the incoming tenant, so it's important to consider both your immediate and long-term financial demands - can I accept a below-market rent to avoid capital outlay?"

Hanna Peard, Leasing Manager:

“Leasing unfitted stock requires a much more targeted approach to the campaign because most sophisticated tenants have already been conditioned to expect a fit-out, but it’s not impossible so don’t let your agent convince you otherwise. Yes, you have to be realistic with your expectations in regards to rent return and time on market but if you, as a landlord, are not in a position to spend big on a fit-out up front, it doesn’t mean we can’t find you a tenant.

In saying that, simply lowering the rent to compensate for a lack of fit-out is not enough. To make this proposition worthwhile for the tenant they have to be winning in other areas, whether it be a reduced bank guarantee, lower rent increases or a more flexible term. One thing we encourage is to engage with a consultant to prepare a full suite of fit-out plans and have them priced before you go to market, that way prospective tenants know what they can achieve in your space and for how much. It will cut down on negotiation time and help a deal move forward much more swiftly, as well as give your agent something to promote instead of a big empty box. We work closely with a few fit-out companies that are happy to prepare plans and concepts for our landlords. Preliminary concepts won’t cost anything but a full suite of ‘For Construction’ drawings will.”

James Webber, Senior Leasing Executive:

“In a post-COVID climate, there are a host of different tenancies available to businesses, through both direct leases and subleases. The vacancies can include new speculative fit-outs, existing fit-outs and unfitted spaces. Ultimately, stock supply and demand levels will dictate the vacancy absorption, but our clients should strongly consider how their property presents with respect to comparable opportunities on the market.

For many landlords, it is a case-by-case scenario and there is no blanket leasing approach that can be applied to different asset classes. It is encouraged that our clients consider the value proposition of the property with respect to tenants requirements in the market.”

Sam Cameron-Hands, Leasing Executive:

“The success a landlord should expect when taking their property to market in an unfitted state will be completely dependent on the leasing strategy set out with their agent. It is imperative that before taking a property to market, the landlord and agent have a tailored leasing plan in place.

Leaving a property unfitted may eliminate many prospective tenants from even enquiring, let alone inspecting or placing an offer. In recent years, this has been most evident as tenants gravitate towards the most convenient option - a ready-to-go, fully fitted-out office space. Tenants can save significant up front capital by securing a fitted space, and with the impacts of COVID in recent years, this has definitely been the preference for many tenants.”