The surge in smaller tenants looking for prime CBD office space shows little sign of easing.
Figures recently released by the Property Council show that for the first six months of the year, around half of the net absorption of prime office space in Sydney’s CBD was made up by deals for less than 1000 square metres.
In Melbourne, deals of this size accounted for around one-third of the net absorption of prime office space.
For GPT, the average size of a new lease in the first half of 2015 was 910 square metres, well down on the average 1,335 square metres in 2014. In GPT’s portfolio, of the 101 deals done for the first half of 2015, 65 per cent were less than 500 square metres.
There are signs demand from smaller tenants is still strong, with the number of enquiries for office space under 500 square metres increasing 30 per cent nationally in the six months to August. In the Sydney CBD, this figure increased 51 per cent.
The GPT and QIC owned MLC Centre will see its number of tenants grow from 36 in 2013 to potentially over 60 once the leasing campaign is completed, while another GPT co-owned asset Australia Square has seen its tenants grow from 57 to 80 since 2011.
At GPT, we see the strong demand from small tenants continuing and have recently subdivided floors vacated by large tenants in some of our premium office buildings such as Governor Phillip and Macquarie Towers where we have installed fitted and furnished suites. This sector is an important part of the market. In the Sydney CBD alone, there are over 4,500 tenants occupying less than 1,000 square metres which represents close to 30 per cent of total space.
There are several factors at play behind the growing demand from smaller tenant. Aside from some large companies and government departments downsizing and consolidated their office space in recent years, the trend towards more activity-based workplaces has also seen these organisations use space more efficiently per employee.
The gap left by larger tenants has been quickly filled by smaller-sized companies attracted not only to prime CBD office space but landmark buildings where they can attach their brand and identity. Being located in a landmark asset does give smaller companies more credibility – and an address that is well-known. There is also the case that smaller firms are looking for better office space – and the features they include such as End of Trip facilities – in an effort to retain staff.
The challenge for landlords like GPT is not only to manage more tenants but also provide growth options for smaller tenants. Many smaller tenants want to be located at the same address for the long-term but also want the ability to move around in the same building over time as they grow. In some ways, managing an office building is like a jigsaw. Office managers more than ever are required to help manage the growth of their tenants.
One example of this is Twitter’s Australian headquarters, which has gone from occupying a 50 square metre serviced office in Sydney’s Citigroup Centre in 2013 to now occupying a whole 1850 square metre floor in the same building.
But there are benefits for landlords in having smaller tenants given they provide a more diversified and less risky profile. Smaller tenants do not leave the large voids of unleased space that large tenants do when they vacate an office building. Attracting numerous tenants to fill one floor requires a lot of effort but it leads to a more resilient asset.
Another benefit is that small tenants usually move in more quickly – more often into a fitted-out space. While it can take up to 12 or 18 months for some larger tenants to plan for their move into a building, smaller tenants are much more agile and are able to relocate as quickly as a month or two from the time they agree to the terms of a lease.
While larger organisations will continue to be needed to commit to large amounts of office space to help large developments such as Sydney’s Barangaroo get off the ground, it is clear that many of Australia’s landmark office towers will need to find more space on the tenant directories in their lobbies.