Why smart tenants are making the move into premium offices

The way we work is rapidly changing. Across Australia’s major cities, proactive tenants are upgrading their office spaces in a process of premiumisation. 

In a post-pandemic environment, premiumisation is defined by tenants who are shifting their office spaces towards high rent, high quality buildings.  

“CBRE Research analysed 220 tenant re-locations over the past two years and found that 66% moved to a building that commanded a higher market rent than their previous premises,” explains Tom Broderick, CBRE Head of Office & Capital Markets Research, Australia. “Only 24% of these tenants moved to a building that offered a lower market rent.” 

This shift is further reinforced by CBRE’s latest Pacific Real Estate Market Outlook 2023 findings, which found a surge in demand for premium office assets. The reasoning behind this rapid uptake? CBD occupiers are increasingly prioritising talent attraction and employee wellness incentives through the use of these quality offices bearing equal or higher market rents.  

But there’s more to the premiumisation movement than just the fundamental requisites of a healthy business. This trend that’s being championed by Australia’s corporate sector brings with it a holistic and long-term vision, which deserves more insight and a closer analysis from CBRE’s industry experts.  

Why occupiers are going premium 

Investing in premium office space provides occupiers with a real opportunity to align their accommodation strategy with their ESG commitments. That’s according to Felicity Tregonning, Associate Director of Workplace Strategy at CBRE.  

“It’s something that most of these buildings have - green and well-being credentials,” she says.   

“And of course, premium offices can also be a tool to attract and retain talent. We have seen a shift in employee expectations of the workplace. Millennials and Gen Z employees in particular want to work for organisations that take care of them and their health and these buildings provide an opportunity for organisations to showcase this.” 

Taking care of employees in today’s employment environment can mean offering: 

• Wellness facilities and programs 
• High quality end-of-trip facilities 
• More natural light or circadian lighting 
• Better air quality 
• Diverse and healthy food offerings 
• Outdoor space 
• Community integration 
• Technology such as smart controls that provide a touchless arrival experience 
• Workplace apps providing convenient services like dry cleaning and coffee ordering  
  
  

On a deeper level, premium offices can also provide more flexibility to occupiers. Tregonning says that this is often reflected within the floorplate itself, from more efficient column grids through to sensors that can measure occupancy and access to third space – an area that can accommodate increased or ad hoc workspace demand.    

Beyond the office component, what’s becoming equally important to office building landlords today is the integration of strategic retail amenity within the precinct. 

“This helps make the customer become more ‘sticky’ in the area,” explains Leif Olson, CBRE’s Director and Head of Retail Leasing Australia.  

“Whether you want to buy a handbag or espresso pod, if it’s close by, it will appeal to customers. Some of the bigger developments demonstrate great placemaking. Brookfield Place at Wynyard encompasses food and beverage services, a supermarket, amenities and fashion; it covers all the bases. Other landlords might not have that much space, but retail’s definitely becoming more important to premium office assets. Even if landlords are able to get an extra dollar or five per square metre from the office leasing, it’s paid for itself by going out to get the best retail operator.  

“That landlord mindset has changed to make sure they’re now trying to get the best operator that will be there in five years’ time.”  

Can the benefits outweigh higher market rents? 

Committing to higher office rents during unpredictable economic times may sound counterintuitive to prudent decision making, but the experts all agree that the benefits outweigh the costs.  

“While rent is important, our data suggests other factors are taking precedence in occupier decisions,” says Broderick.  

“Re-locations allow occupiers to move physically closer to their end customers. It allows them to re-configure workplace design to attract and retain talent while also matching ESG ambitions with energy and wellness offerings in the new premises.” 

Tregonning notes that an organisation’s biggest cost is their people followed by their real estate.  

“Where a premium building can effectively contribute to ESG commitments, talent attraction and retention, and provide more flexibility to better utilise an organisation’s footprint, then this can outweigh the higher market rents. Following the rise of hybrid working, we are also seeing numerous organisations right-size their workplace and reallocate these savings to higher rent.”  

Olson is adamant on the potential of premium retail space in office buildings and simply says: “It pays itself off.” 

“For the office landlord it’s become less about the return in the retail and more the return in the tower. If an office tenant is happy with the café downstairs, they’re more likely to sign on. Having the wellness yoga studio, a gym close by and services sitting in and around it makes it appealing.”  

Economic effects on premiumisation 

Premiumisation isn’t isolated to just Australia’s major east coast cities. Olson says it’s a concept that’s being considered by all office landlords across the country including business park locations. But, given consistent interest rate rises and an unpredictable economy, the question of sustainability needs to be asked. And Sameer Chopra, Pacific Head of Research at CBRE, is more than willing to share his expert forecast. 

“It's a really fascinating theme, this concept of premiumisation and people aspiring to be better in every aspect of their life. We're seeing this in every aspect of real estate: premium residential, premium retail, premium offices.  

“And you see it in sharper cap rates, you see it in much lower vacancy. You see it in much higher rents for these places. We've built a rough rule of thumb that somewhere between 20% and 25% of the market wants a premium product.  

“About a quarter of all the seats sold on a typical Qantas plane that flies internationally are business class or premium economy. A quarter of Australians send their kids to private schools. 15% of people are buying premium luxury cars. So that's kind of a demand equation and we've seen it's relatively insensitive to economic cycles; people continue to aspire, continue to spend on premium products. So, I would expect it's going to remain pretty robust despite the economic cycle.” 

WFH vs premiumisation’s office proposition 

Companies are at an interesting crossroads today. There’s a need to balance the priorities of keeping employees satisfied by offering them the flexibility of working from home, while also driving the goal of attracting staff back into the office through practices such as premiumisation.  

The question then becomes: Is it feasible or even possible to achieve both?  

Absolutely, according to Tregonning.   

“Most organisations have accepted hybrid working as part of their new normal and are repositioning their workplace accordingly, so it is absolutely feasible to do both, but organisations need to look holistically at their workplace and understand what’s driving employee behaviour.  

“Organisations should determine how occupying a premium building changes the value proposition of the workplace for employees and this will look different depending on the demographics of their people.” 

Benefits of premiumisation for investors 

On the investor front, Olson explains the substantial benefits for an owner of a building who can get a good retailer. 

“It will help them lease the office tower much more quickly. And hopefully at a premium rent by having good social and retail amenity in and around the precinct and on those ground floors to make sure they’re getting a retail experience that represents who they are.”  

Is premiumisation a trend or strategy?   

“I think it’s here to stay,” says Olson.  

“I was on a panel with a footwear retailer who said consumers want their values to align with the brand they’re buying from. Whether that’s coffee or a pair of shoes, they want to make sure sustainability is front of mind. 

“In terms of office buildings and the retail associated with them, I think we’re starting to see more flex space used for retail. Giving opportunities for different types of usages that can go in and pop-up with short-term activations such as free skin checks or health assessments, that’s all starting to help establish the long-term potential of premiumisation.”