London: BNP Paribas Real Estate
Growth of flexible lease model to continue in 2019 as uncertainty prevails
The MSCI recently hosted its UK Lease Events Review event, which discussed its latest report looking at the trends in leases that took place across 2017, which included new leases, break options and lease expiries across different sectors.
A key finding from the report was that offices had the highest level of immediate vacancy at the time of lease expiry in 2017 sitting at 69%, well above the long-term average.
So why is this happening now? One possible reason could be the move towards increased efficiency amongst occupiers, who may use a lease expiry as an opportunity to downsize, relocate or simply right-size their strategy. However, a likely driver of the trend is the correlation between the demand for, and availability of, flexible office space as well as the boom in serviced office providers over the last couple of years.
We have also seen a number of businesses, who are looking to take shorter office leases, negotiating with traditional landlords who are increasingly in competition with flexible office providers. The MSCI report reveals that average office lease length in Central London declined from 11.5 years in 2011 to 7.7 years in 2018. Although we haven’t yet seen an impact on the average office lease length sector-wide, we could see more occupiers taking this approach over the coming months against the backdrop of political and economic uncertainty.
There continues to be rapid expansion by the big players in the flexible office space, such as WeWork and Regus, as well as the continued emergence of smaller, niche players with a service-orientated model where the occupier is a ‘member of the community’ and benefits from a highly bespoke and targeted offering. Events spaces, community atmosphere, shared gyms, rooftop terraces, bicycle stores and speaker-events are just some of the facilities that occupiers can utilise across flexible office spaces, all without the hassle of having to organise the fulfilment.
Another potential driver for decreased lease lengths will be the impact of IFRS 16. Businesses will have been concentrating on ensuring compliance for the January 2019 deadline, but as future business and property strategies are developed, the impact of carrying leases on a balance sheet may well see the shorter lease trend develop further.
As the world continues to change, we might anticipate seeing this flexible lease model being adopted by other sectors. In logistics, for example, occupiers may start to look for greater flexibility in leases depending on the contract length that they are fulfilling. Alternatively, occupiers may try to partner with flexible office providers to offload any excess leases, through subletting or assignment of lease basis.
The full MSCI Lease Events Review can be found here.
Elaine Murphy is a Director in the Occupier Solutions team and was a panel member at the MSCI UK Lease Events Review event 2018.