Signing Office Anchor Tenants Has Its Pros & Cons
SINGAPORE – Securing an anchor tenant at a commercial property, especially an office development, has its perks and disadvantages, reported The Business Times on Monday afternoon (12 December, SGT)
For instance, Amazon has agreed to lease 11 levels collectively measuring 369,000 sq ft or 30 percent of the overall office space at IOI Properties’ landmark new project, IOI Central Boulevard Towers, which is expected to be completed next year.
Securing the e-commerce giant as a major anchor tenant likely brought relief to IOI Properties given that the project is taking 6 years to complete. The mixed-use development will consist of a 16-storey, a 48-storey tower, and 7-level podium with around 30,000 sq ft of retail space and 1.26 million sq ft of Grade A office space.
“Signing up a big office tenant ahead of project completion significantly de-risks a new office project. Fears of building a white elephant that is largely empty post-completion and running operating losses can be gradually put to rest,” commented Business Times’ Leslie Yee.
After clinching an anchor tenant, an office building under construction will enjoy positive rental momentum. For instance, other would-be tenants may expedite inking their office lease to prevent choice floors they are targeting being taken up by other companies. As more workspace gets pre-let, a property developer can impose tougher lease terms or raise asking office rents.
Signing a blue-chip firm as an anchor tenant boosts the project’s branding, and this would help attract smaller businesses to lease space in the development that has been chosen as a regional HQ of a renowned multinational corporation (MNC).
However, there are drawbacks with signing up large anchor tenants. For instance, their lease may come with terms that are highly favourable to them, like a 5-year lease or more, wherein the office rent is discounted by 25 percent as compared to smaller occupants. An anchor tenant may also seek generous fit-out cost subsidies or rent-free periods.
“In sum, an office landlord may be wise to balance pursuing big anchor tenants with filling up space at a slower pace by targeting multiple users that have smaller requirements. Possibly, filling up a building with many smaller tenants can lead to higher revenue. From a risk management perspective, diversifying revenue risk across multiple tenants and tenants from different sectors makes sense,” explained Yee.
Furthermore, commercial property owners may decide to keep some office space vacant, as these can be offered to existing occupants at high rental rates if the latter unexpectedly needs to expand in the short-term.