The Real Cost of Office Incentives

Australia’s office market is a global outlier when it comes to leasing incentives which can reach nearly 50% in some cities. Far higher than places like London, Tokyo and New York. These incentives, from rent-free periods to fit-out contributions, have become deeply entrenched in leasing practices. While they help close deals, they also distort market transparency, and misrepresent market rents. Which makes it harder for occupiers and investors to understand true value.  

This opacity increases reliance on insider knowledge and complicates underwriting, valuations, and policy decisions. Despite their drawbacks, incentives persist due to long-standing industry norms, vested interests, and limited global exposure. Greater transparency on effective rents would help reduce risk, support better decision-making and create a more efficient, accessible market.

Any business who has leased premises has experienced the mythical world of office incentives. Incentives, which can range from rent-free periods to fit-out contributions, from flexible terms to parking spaces, are an ingrained feature of the Australian market. Their commonality and generosity are unique globally and can be confusing to outsiders. 

In this article we examine Australian office incentives. We explore what they are, how they have such a distorting impact on the market, and why they have become such a prominent feature of the Australia market.  

Incentives: Outsized and ubiquitous  

Australian office incentives are associated in some way with every lease. They come in a variety of forms (Figure 1), and often take the form of rental abatements, rent deductions or fit-out-related activities.

Figure 1: Common types of Australian office incentives

Currently, office incentives range from 28% in Canberra to nearly 50% in Melbourne and Perth (Figure 2). This makes Australia a global outlier in regards to the scale of incentives. For example, prime office incentives in London’s West End average around 20%¹ whilst in Tokyo and New York they are below 10%^2,3.

Figure 2: Prime market averages, Q3 2025

In theory, incentives should rise when the market is tenant-favourable and fall when it is landlord-favourable. In reality though, even in strong landlord markets incentives have remained high, suggesting that there is more than cold hard economics driving them. 

Impacts: Inefficiency and distortion 

High office incentives create market inefficiency. They artificially increase the perception of market health. Opacity makes it harder to benchmark deals and increases the risk (or opportunity) for mispriced assets as investors may incorrectly underwrite details.  

They increase the advantage for leasing agents or asset managers who know non-public information about buildings and their incentive packages, creating asymmetric information advantages. They make it harder for occupiers to get a true picture of market dynamics and value. Two occupiers paying the same face rent may be paying wildly different effective rents due to the interplay with incentives.

Distortion complicates valuations and decision-making for both occupiers and investors. For overseas investors who are not used to seeing such large incentives, it makes the market less readily understandable, it increases deal risk and ultimately makes the market a less transparent environment.  

Given the detrimental impact of incentives, why are they so ingrained? We think there are four reasons that explain their persistence: procedural norms, vested interests, industry awareness and tenant benefits.

1. Procedural norms 

Face rents have been embedded in leases, agency practices and market reporting for decades. Changing that convention today would be messy, disruptive and resisted by those accustomed to the existing system.  

2. Vested interests 

Large institutional landlords dominate Australia’s office ownership. Reporting face rents can project market stability and strength even during periods of softer demand. Higher headline rents help maintain asset valuations. They provide a strong starting point for negotiations, since incentives are adjustable ‘below the line’. Opacity increases the value of insider knowledge, relationships and market intelligence. 

3. Market insularity 

Many professionals who have worked only in Australia may not realise that global markets operate differently. Without exposure to alternative systems, there is little pressure to adopt a new model. 

4. Tenant benefits 

Tenants often choose not to fund their own fit out and look to solve that via a contribution from the lessor. That is achievable under a face rent and incentive structure. 

Incentives: Here to stay 

Australia’s instance on face rents is unlikely to change any time soon. The practice is too deeply ingrained, and the key players have little incentive to alter it. However, greater transparency would undoubtedly benefit the market. A clearer view of true rental value would reduce risk, improve investment confidence, and help occupiers negotiate fairer deals. 

For real estate stakeholders wishing to encourage and deliver new development – state and local government, builders and investors – face rents may make it harder to stack. Whilst face rents may be at the economic level required to justify new development, the effective (or true) market rent could be far lower. They have the potential to inflate land value and distort policy. Uninformed stakeholders could miscalculate development feasibilities. This increases the need for specialist advisors to help make sense of the obscure market. 

References

¹ Knight Frank. (Q3 2025). “London Office Market Report”. Accessible from: The London Office Market Report - Q3 2025 | Knight Frank Research

² Colliers International. (2025). “Tokyo”. Accessible from: Tokyo | Global Occupier Guide

³ New York Offices (December 2025). “Office Leasing Incentives in NYC: What Tenants Should Know”. Accessible from: Office Leasing Incentives in NYC: What Tenants Should Know - New York Offices