The length of UK office leases has fallen to the lowest level on record while vacancies rates have soared close to a decade high as the shift to working from home shakes up the market.
It highlights big changes since the pandemic as staff who adopted remote working in lockdowns rarely come into the office five days a week, while companies have cut costs and headcount in the economic slowdown.
Average lease lengths dropped to two years and 10 months in the first quarter, the lowest level since data was first collected in 2018, according to commercial property management platform Re-Leased.
It is down from nearly four and a half years at the start of 2019 before the Covid-19 pandemic as the uncertain economic outlook and changing working patterns fuel a reluctance to commit to long-term contracts.
Letting contracts of a year or less accounted for nearly half of all leases in the first quarter, a more than threefold jump since 2019.
In a snapshot of the current market, UK office vacancies rates have also soared to 7.6 per cent, a nine-year high, according to data provider CoStar.
“Companies are still determining what their office requirements will be in this new world of flexible work,” said Tom Wallace, chief executive of Re-Leased.
“Given this uncertainty, there is a clear reluctance to commit to a long-term lease.”
The tougher environment has forced companies to cut costs through lay-offs as they temporarily downsize offices amid fears of recession, Wallace said. He pointed to the tech sector as particularly vulnerable.
“A lot of [tech] companies have been in growth mode, so when the economy contracts they’re kind of overweight and are the first to react in terms of downsizing their requirements,” he said.
Traditional landlords are responding by offering flexible, short-term leases, first popularised by specialist companies including co-working space manager WeWork.
“Many [traditional] landlords are happy to cater to this,” said Richard Townsend, partner at property consultancy Allsop.
“It enables them to avoid current inflationary pressures, which have significantly increased the costs of refurbishing vacant space,” he added.
Graham Clemett, chief executive at Workspace, a company that rents out flexible office space, said short-term leases were changing the relationship between landlords and tenants.
Landlords are now having to “work a little harder” to secure their rent income, he added, providing tenants with amenities such as bicycle storage and cafés to ensure they renew their commitments.
“We’ve got to treat them more like customers and give them the quality of service they want as opposed to saying: I’ll see you in 10 years,” said Clemett.
The number of long-term leases of more than 10 years has dropped 70 per cent since 2019 with these contracts making up just 1.46 per cent of all leases, according to Re-Leased.
Townsend said long-term contracts, however, remained a favoured option for the very best office buildings, which were in high demand, while landlords were having to be more flexible with older buildings.
“A great space is an asset to a business,” said Wallace. “If they pick the right one, they want to commit to it.”
Analysts say the commercial real estate market has split, with strong demand for high-quality buildings in desirable locations that meet environmental requirements while there is a lack of interest for others.
“There is always going to be a number of flexible options in the market now,” said Wallace. “The days of long leases being standard are gone.”
Source Financial Times https://on.ft.com/3t3hVx4