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Who is shouldering the rising cost of office fit-outs?

By Juliet Helmke
22 February 2024 | 12 minute read
peter vines reb e3mzzn

To increase office participation, companies are turning to luxury amenities. But construction is making this an increasingly costly endeavour.

Peter Vines, a commercial real estate expert from Ray White Commercial Western Sydney, explained how those costs are trickling through the real estate ecosystem.

With office vacancies still far below pre-pandemic rates, it’s been well documented that commercial spaces in this sector need to offer something extra to secure tenants. That’s resulted in a so-called “fight to quality” that has made the luxury end of the market actually quite competitive, while stock standard spaces continue to struggle to lock down leases.

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As Mr Vines pointed out, that has resulted in some landlords looking to improve their product to compete in the higher end of the market, adding certain features that attract tenants because of their direct appeal to office workers.

“End of trip facilities are a basic style of product now,” Mr Vines said by way of example.

In buildings that can accommodate a food and beverage business, he added that ensuring the quality is of a high standard will speak to the audience seeking added amenities.

For those able to go an extra step, “wellbeing has been something which has been talked about for a long time. Whether it be yoga rooms or meditation gyms,” he said.

And while ultimately the task of attracting workers back to the office comes down to the individual companies and how they complete an office to meet their staffing needs and desires, Mr Vines noted that the trend of high-end fit-outs is having an impact on building owners as well.

“The individual tenants will typically go that step further to make sure that within their space, it’s a really nice kind of environment for people to work in,” he said, but noted that rising construction costs have been pushing up the price to get this work done.

And in an environment where negotiating power is typically held in the hands of the tenants, Mr Vines indicated that “a lot of them are passing the increased costs onto the landlord”.

“Companies aren’t only moving because theyre trying to entice their staff back into the office. Its also because its probably one of the best times ever to negotiate. And often that comes in the form of contribution towards these really beautiful, stunning offices. That’s what landlords have to do in a competitive market,” he commented.

While there’s a long way to go before the balance significantly tips to even the playing field, Mr Vines noted that the luxury office trend is likely to outlast this current market dynamic, and that tenants lacking that negotiating power might look for other cost-effective ways of shaping their office around workforce needs.

In Sydney, he sees a bright future for offices in locations like Parramatta that have a high chance of being closer to employees homes – albeit a farther distance to travel for some CEOs.

“Parramatta is so attractive in terms of a location with rents virtually less than half of what they are in the CBD. A lot of employees are going to be living out there because of the cost of living.

“I think, traditionally, whats happened is that office space has been chosen based on where the executives live – in the inner suburbs and north shore. But I think that those days of the C-suite governing where offices are, I think that will change dramatically,” Mr Vines opined.

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ABOUT THE AUTHOR


Juliet Helmke

Based in Sydney, Juliet Helmke has a broad range of reporting and editorial experience across the areas of business, technology, entertainment and the arts. She was formerly Senior Editor at The New York Observer.

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