If office tenants are to optimise their tenancy arrangements in 2024 and beyond, it is essential to understand what is happening on the supply side. Landlord market reports provide insight into their expectations for 2024 and beyond; this is important information for tenants intending to revisit the negotiating table.
Landlord-originated office market reports for Australia and New Zealand cities concur that the 2023 headwinds will continue through 2024, suggesting that indicators point to these headwinds easing somewhat. They expect significant tenant relocation and upgrade activity to continue, driven by demand for higher-grade accommodation and shifts in CBD locations that are considered prime. A further expectation is that investment activity will be cautious, due to high interest rates and market uncertainty. The related landlord expectation is that the outlook for owners will become more positive through 2024 and beyond, implying a softening of incentives on offer to tenants and a pick-up in asset prices.
This outlook would suggest that the opportunities for office tenants to improve their tenancy arrangements will decrease. As conflict-free tenant advisors, it is our view that the opportunities for substantial reset and improvement in office tenancy arrangements will continue through 2024 and that these should be pursued.
From the office tenant perspective, the following factors are relevant and important for tenants to bear in mind when participating in 2024 lease negotiations, for they create tenant leverage. The return-to-work / work-from-home debate is ongoing, with landlords having to go the extra mile to increase the attractiveness of the CBD buildings to entice employees and employers to take up CBD space. A related issue is the number of tenants moving to a smaller CBD footprint, which continues to generate vacancies and sub-lease requirements. This increases the alternatives available to office tenants, and alternatives are leveraged. I should add that flexible or short-term lease arrangements are appealing to the numerous tenants who are yet to finalise their long-term accommodation strategy, and this adds to tenant leverage as both short-term and long-term arrangements present as potential solutions.
In conclusion, we think the landlord narrative about the 2024 state of the Australian and New Zealand office markets understates the supply-side challenges, and we opine that the opportunities for office tenants to achieve more flexible and cost-effective tenancy arrangements will continue through 2024. Information is power, and skilful negotiation is key.
