‘Landlords feel the pain’: London office lease lengths lessen

The average length of a London office lease has plunged in recent years as occupiers look for more flexibility around their real estate. A new study from Kitt, a managed office operator, found that lease lengths for space of less than 10,000 sq ft have shortened by more than a third in the past five years, from eight years in 2019 to five now. The average length has decreased by more than 20% in the past year alone. “That’s a pretty steep curve,” Kitt co-founder Lucy Minton told EG. “If you think about the way landlords sell their businesses, or have done historically, it’s an asset, a pension pot, an income-generating asset that you don’t have to do very much for once you’ve bought it. That’s fine if you have a tenant doing their own fit-out and then leaving after 20 years. You give them their keys and say hello again in 19 years and six months.” But the report, Thrive Not Survive, notes that landlords now need to win over tenants two to four times as often as they did historically, taking into account both shorter leases and break clauses. “Shorter lease are now mainstream”, the firm said in the report, with more than three-quarters of office owners reporting increased enquiries for flex space over the past year. “In a world where two or three years is the average stay, the game you have to play as a landlord is retention and marketing. Landlords are starting to realise that the game has changed and they’re starting to feel the pain,” Minton said.  Kitt said that if asset owners take the right approach to their offering, they could fill space at rents 75% higher than a traditional letting structure. “The way offices are being used has fundamentally changed,” Minton added. “That will have an effect on the dynamics within the industry. Companies want their space to do more for them and bad space just won’t get sold, because it doesn’t fit the brief.” Economic uncertainty too has encouraged a rethink for some occupiers. “Companies aren’t willing to take as long term a view as they used to. And with the availability of flex and flexibility increasing, I don’t see an argument for why they ever will go back to 10-year leases,” Minton said. “The world is changing so quickly, why would you go backwards? And if landlords can see the light, there’s money to be made. They just need to think about it in a slightly different way.” Minton pointed to “forward thinking” office owners such as GPE that have embraced offering flexible and managed space. At EG’s recent Future of the Workplace conference, GPE’s director of flex said offering flexible space alongside the company’s traditional headquarters sites had helped it keep growing occupiers, confident that all stages of their expansion would be catered for. “There’s a symbiotic relationship between HQ and flex – there’s a lot of value that our HQ business adds to the flex side of our business: credibility, reputation, the infrastructure and admin,” Rowley said. “In many ways, HQ represents the ‘grown-up’ side to the business and flex the ‘youngsters’ who can still teach the grown-ups a thing or two: things like customer centricity; service provision; the value of data; and amenity, as we are working with shorter leases and retention is everything.” Photo © Headway/Unsplash