Australian industrial incentives: measuring their impact on rentFebruary 18, 2015 / By
I often get asked by colleagues and clients about average rental incentives for industrial property in Australia. My running joke with another Research colleague is that “there are no incentives in industrial property, are there?”
The basis of the joke is that due to the relative lack of transparency in industrial leasing and the form in which incentives are provided to tenants, it is hard to provide a simple and consistent answer to the question. For this reason, JLL Research has reported net face rents for both existing property and pre-lease deals in the sub-markets that we monitor. Unlike in the office sector, we do not calculate average net effective rents for industrial.
More recently we have set about collecting an estimate of net incentives from our leasing and valuation operatives. While not yet officially reported, we have tracked incentives on a quarterly basis in most markets since 2013. The reason for this was twofold: it was becoming increasingly clear that incentives had been broadly rising in many markets; and we wanted to provide the most reliable information possible to our clients.
In undertaking this exercise, a couple of observations have become apparent:
- There is a wide range of incentives offered across markets for existing vacant stock, speculative developments and pre-lease developments. Significant variations exist between prime and secondary grades within sub-markets too.
- The form of the incentive provided varies widely and can include a rent free period during the term of the lease (most commonly, but not always, at the beginning of the term), a cash component, fit out contributions, capital works on the building or payment of a lease tail at the tenant’s previous premises. The question of make-good can also come into calculation. I have been told that in rare circumstances, other gifts may be offered to a tenant to sweeten a deal.
- Generally, private owner landlords and institutional landlords and developers will structure their rent and incentive negotiations differently.
While incentives for industrial property have existed in some way, shape or form for the entirety of my career, by their nature they are hard to calculate as a party not privy to the terms of the deal and therefore we have had difficulty reporting them as a simple percentage of rent or expressed as months’ rent free. At present, a range has been adopted (expressed as months’ rent free as a percentage of the initial term).
Source: JLL Research
The feedback we have received from our leasing agents is that the first question a tenant or their representative asks a landlord or their agent today is “What’s the incentive?” This demonstrates that the answer to that question is increasingly important to the final decision a tenant makes.
While I may continue to trot out that running joke with my colleague about there being no incentives in industrial, our research shows that incentives have increased in recent years and are becoming a more pervasive feature of lease negotiations. The joke is becoming old quickly.
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