If you’re a landlord with a vacant office space, you’re likely grappling with a big question:
“Do I spend the money to fit it out now, or wait and hope a tenant comes along who’s happy to do it themselves using the incentive?”
It’s a familiar debate, but the numbers tell a compelling story. This applies to both tight markets like the Gold Coast and softer markets such as Perth, Melbourne, and Adelaide.
Did you know: more than 80% of our commercial leasing enquiries are for fitted options ONLY?!
Why? Because relocating often just doesn’t make sense for tenants. A fitout can take months, require significant upfront capital in the current high construction cost environment, and disrupt operations. If there are limited or no suitably fitted options in the market, most tenants are renegotiating where they are; it’s easier and often cheaper.
Additionally, with the rise of flexible working and the work-from-home movement, tenants today are less pressured to move premises as their workforce needs evolve. Rather than relocating due to a 10% (or sometimes even greater) increase or decrease in headcount, many businesses are now able to adapt within their existing space, making more efficient use of what they already have. This shift has reduced the urgency around upsizing or downsizing and made long-term occupancy more practical and appealing.
So, what happens when you wait for an occupancy with a non-fitted space?
Let’s take a 500sqm A-grade vacancy example on the Gold Coast:
- Assume you’re offering a $262,500 incentive (15% of a 7-year lease @$500/sqm) to be applied to rental abatement or to a tenant’s fitout, for an open-plan base-build tenancy, and the space sits vacant for 12 months.
- At $500/sqm net, that’s $250,000 in lost rent, plus the outgoings (assumed at $140/sqm).
- Approx. $320,000 gross out-of-pocket with no lease and no activity for a year.
Now, what if you fit it out?
- You invest $600,000 at $1,200/sqm for a clean, fitted, modern, ready-to-occupy space.
- A lease is secured on a 7-year term at $500/sqm with 4% annual increases.
- That lease returns $1.97 million in base rent over seven years (plus outgoings).
Here’s the important and compelling part:
Securing a lease turns your property from just a static asset into a real income generator, and that income directly boosts its value.
In commercial property, value is usually based on the net rental income using the capitalisation rate (or cap rate) method. Simply put, a property with a stable, leased income stream is worth a lot more than one sitting empty.
For example, using a conservative 6.5% cap rate on market rent with a solid tenant, the lease value comes to around $3,846,154 (this doesn’t even factor in annual rent increases, which would push the value even higher!)
Now, imagine the landlord doesn’t invest in securing a tenant and instead offers a 15% rent reduction, just to get someone in quickly. That would drop the property value to about $3.2 million, assuming they find a tenant within the same timeframe. But realistically, you might face at least 12 months of vacancy, meaning not only a $600k drop in value but also a loss of $250k per year in rental income.
So, spending $600k on a fitout doesn’t just get you a tenant paying rent today, it’s actively building your equity and boosting your property’s value. This makes your asset more attractive to lenders and future buyers.
In short, your upfront investment pays for itself through rental income and increases your property’s worth by securing a reliable income stream. And, don’t forget you can also depreciate the fitout over time, which is another financial benefit.
In a tight market, like the Gold Coast, where A-grade vacancy is just 2-3% and there’s no new supply on the horizon, a well-presented and ready-to-move-in offering provides a real enticement for a stubborn vacancy to a tenant that would otherwise simply renew. And, in a softer market with higher vacancy, a fitted or speculative suite provides the edge over other competing vacancies.
While the specifics may differ across commercial markets, the underlying trend is clear: non-fitted spaces are simply not leasing. Landlords who take a proactive approach, offering fitted or turnkey solutions, are the ones consistently securing tenants and generating income more quickly.
Nick Selbie
Director – Commercial & Advisory
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Nick is at the forefront of delivering tailored strategies and results that align with each client’s vision within acquisitions and buyer’s advisory services, commercial leasing, property management and tenant representation. Nick thrives on building relationships and ensuring every client receives the highest level of service.
