A question commonly asked by landlords and tenants alike is “what is the difference between an existing and a 2nd Generation Spec?”
The idea of a 2nd Generation spec stems from the beginning and starts long before the space enters the market as a vacancy. There is plenty of value in effectively built spec suites in the first instance. The idea of constructing these fit outs initially is to ensure that a ‘market’ 30 – 40% incentive isn’t given for the second period of tenancy or for the instance of this article the “2nd Generation”
A well thought-out and designed spec fit out will allow landlords to leverage the inherent value of this initial spec suite to ensure that attractive deal parameters are achieved for the second tenure with a range of 20 – 25% being a figure to aim for.
Achieving such terms for a second tenure can be broken up into three key steps:
- The first, as previously mentioned is ensuring that the initial spec fit out is built to a high-quality catering to the market needs/trends. This is a product of a combined effort from the landlord, appointed agent/s, and fit out contractors with each acting to ensure that the space is effectively designed.
- Secondly, the make-good requirements need to ensure that the tenancy is returned presenting in accordance with the condition report taken at the start of the lease. To achieve this, it is imperative that there is a clear understanding from both tenant and property management as to what the make-good requirements are, and that these are strictly enforced.
- Finally, once the tenancy is returned to its initial condition, pro-active landlords will typically apply a calculated and critical approach in making any improvements necessary to the space to ensure that when it comes to securing a new tenant, the commercial terms aren’t compromised. Often if the space is effectively designed in the first instance this final step is rarely necessary.
Detailed below are a number of successful outcomes from the last 12 months in which the landlord has been able to re-lease a spec for its second tenure with minimal compromise on commercial terms.
An important point to note here is that none of these spaces have had to give out any higher than a 25% incentive with the average lease term being 3.8 years. When these spaces were first introduced to the market as spec fit outs, the landlords and appointed agents ensured that they were effectively designed to consider both present and future market trends/tenant needs. In doing this they were able to secure a new tenant for an additional 3 – 6 years after the first tenure and not compromise on their incentive or face rent.
Perception plays a massive role here and ultimately the subsequent re-leasing of a space will be 99% dependant on how the market views said space in comparison to other availabilities. An example of this can be seen in a recent 127sqm deal done in 110 Eagle Street. The space was being marketed as a “2nd Gen Spec” aiming to achieve a 20 – 25% incentive. The reality of the space is that it was quite dated and lacking in several key elements. The tenant had been through a number of high-quality spec and 2nd Gen spaces on inspections to know that given the lesser quality of the 127sqm they could achieve a much higher incentive than what was originally offered. This resulted in the below deal parameters being achieved which is the unfortunate reality for a number of 2nd Gen spaces on the market due to oversight in the initial design of the spec and re-leasing process.
l have also highlighted two additional occasions where landlords have clearly fallen short of the mark with their initial construction of the spec fitouts and re-leasing of the spaces. This oversight has ultimately led to the landlord ‘falling on their sword’ to secure a new tenant for second tenure.
The onus here was on the agents, as the initial specs designed didn’t implement the appropriate strategic view towards the “leasability” of the space to achieve an optimal deal.
To conclude, pro-active landlords will apply a calculated approach in a combined effort with their appointed agents to ensure the spaces within their assets remain competitive allowing them to consistently extract the residual value of their specs and 2nd Gen specs.