Demand for fitted space gives rise to office buildings soon to be demolished

Demolition office blocks primed for development offer a higher degree of flexibility and is appealing to tenants seeking a cost-efficient CBD location, JLL has found.

Demolition stock refers to office buildings that have been unlocked for ‘higher and better use’ through redevelopment, and accounts for 6.9% of total office space in Sydney CBD.

JLL’s Office Leasing (NSW) Senior Executive Jenny Co said, “The term ‘demolition stock’ paints an unattractive picture but the reality is far from this. These buildings are largely A and B-Grade assets and often provide great amenity. The most common characteristic between demolition buildings is their premium locations, surrounded by public transport, food and beverage and retail options, and this is one of the most attractive features for occupiers.

“These sites tend to be extremely well-located, which is supported by the fact that these buildings have been selected and acquired for redevelopment. The redevelopment can be residential, hotel, office or for other public infrastructure,” said Ms Co.

Han’s Group General Manager, Andrew Lau said, “A unique characteristic of a site that is identified for development is the timing of when you can unlock the development project value, normally referred to in the market as ‘vacant possession’. Therefore WALE (Weighted-Average-Lease-Expiry), although still an important metric for us, generally works against our ability to unlock the development potential of the site. 

“As a result, we can look to accommodate more flexible lease tenures with our tenants, which in turn provides the flexibility that most tenants are seeking, in an environment that is still clarifying what the next phase of the workplace holds.

Han’s Group owns and develops commercial, hotel and residential properties globally. The firm has acquired a number of CBD buildings with plans to deliver a landmark building in the heart of the Sydney mid-town precinct.

Ms Co said, “Prior to the pandemic, 5-year lease terms were the standard. Now, the tide has shifted to 3-year lease terms as tenants now value flexibility, and this is shrinking the gap between demolition stock and standard office assets,” said Ms Co.

Mr Lau said, “Flexibility has been a topic at the forefront of most tenant discussions over the past 12-24 months. While most companies have announced initial return to work approaches, a division remains between company and worker expectations. With this structural shift yet to stabilise, tenants are seeking flexibility on their lease tenures, whilst they bottom-out their future workplace strategies.

“With our Sydney portfolio, we have observed some general trends with our office tenants. For our existing tenants, we have noticed higher retention rates, as companies continue to assess their future workplace size, configuration, and staff offerings.

“With our new leases, a large portion of these have been struck with non-CBD tenants seeking shorter lease tenures, possibly ‘testing’ the company benefits of a relocation to the CBD. For the company, this flexibility in lease tenure will enable them to offer their staff improved precinct access and amenity, whilst they continue to monitor and see if this locational change will assist in promoting their staff towards to a more weighted office ‘in-person’ work arrangement,” said Mr Lau.

Rent is generally lower than market rates given the shorter lease terms, which is then often paired with higher incentives. Tenants also reduce costs by inheriting the existing fit-out from the prior tenant to maximise their incentives, and generally there are no make good costs upon moving out either, which is a significant cost saving for tenants.

Ms Co said, “The tenant-ready ‘plug and play’ model of these spaces enables an organisation to turn up and start working straight away, reducing lead time between tenants and providing stable cash flow for landlords.”