Post-COVID, New Leasing Solutions Are Winning Tenants
From the aftermath of the initial COVID-19 shock, new lease structures are emerging. Traditional real estate leases were already becoming scarcer as new, more flexible models gained popularity, but incremental changes to how the industry operates are now picking up speed.
“We believe that COVID-19 has accelerated trends that were going to play out over the next maybe 10 years, down to about two years,” Re-Leased CEO Tom Wallace said. “A shift from high street retail to online, the sharp increase in flexible working, and a rise in industrial demand are all examples of these changes.”
As landlords seek to de-risk their portfolios and tenants come to terms with the spaces their staff and businesses now need, the more agile property owners are creating a wide range of solutions. Crucial, however, are transparency and communication.
“While the broad objective is to get the economy back open, in such a fast-changing and uncertain environment tenants are understandably more cautious about signing leases and occupying space,” Evans Randall Investors Director James Edwards said. “Adopting a flexible and proactive approach to dealing with tenant concerns has been the way forward in our experience. There is no denying it’s a challenging environment but getting alongside tenants and being constructive shows a real commitment and investment in the relationship.”
Give Tenants What They Need
When the pandemic first hit and lockdown was imposed, rent collection was hit hard. However, already the situation seems to have plateaued, for the office sector at least. The open conversations between landlords and tenants that are happening seem to be bearing fruit already.
According to Re-Leased, which provides commercial property management software and collects real-time data on how the sector is performing, rent collection for the June quarter is tracking at the same level as March. On day 21 of the June quarter, the UK average collection was 57% compared to 54% for March. In all real estate asset classes, June is beginning to show signs of outperforming the preceding quarter.
“Access to real-time data has been crucial to enable landlords and tenants to understand the impact that COVID-19 is having," Wallace said. "This crisis has given rise to the importance of using modern cloud-based technology, which brings information to the surface and enables timely and efficient decision-making from anywhere in the world. The pandemic hit with no warning and there is no playbook on how to respond so it is incredibly helpful to understand how the wider market is reacting.”
Evans Randall Investors has brought forward a number of solutions at its midtown development bureau, which has resulted in three deals signing during COVID-19.
“Solutions include short additional rent-free periods, agreement for lease structures and reversionary leases,” Edwards said. “This is all to help mitigate concerns with the aim of providing the necessary level of comfort depending on where tenants and potential tenants are at with their respective signings and fit-outs.”
Evans Randall has also had requests for short-term lease extensions from existing tenants at Thavies Inn House to give tenants more breathing space to consider the longer-term outlook. Many businesses are grappling with fundamental changes to business operations regarding working from home versus working in the office and few have an understanding yet of what their ongoing occupation requirements will be. Now it has been established, what is the optimum mix? Is it better for staff wellbeing to provide comfortable, risk-free office space?
“We need to remember that we are still relatively early on in this process, but businesses and employers will have to respond to what their staff want and do not want,” Edwards said. “Regarding offices, it is the working practices surveys that are most interesting I think. What we have seen overwhelmingly is that most people want increased working flexibility and a combination of working from home and working at the office, so the office will ultimately need to reflect this.”
Change Is Here To Stay
Although many of the solutions proposed by landlords and investors are a direct reaction to the COVID-19 pandemic, the general belief is that the industry has changed for good.
“We were already seeing pressure on some lease structures pre-COVID,” Wallace said. “For example, our data was showing that average office lease lengths were consistently dropping, most likely in response to the rise of flexible office leases offered by flex workspace providers. We expect this will continue, particularly if demand for office space softens in the short term. We also expect to see a rise in turnover rents in retail as landlords look to create ways to fill space that has become harder to lease.”
Edwards agreed; the changes that were brought in quickly are now going to feed into a longer-term shift in the industry. Landlords and investors have already tuned in to tenants’ needs during this difficult period and, going forward, the focus needs to remain on helping them to be as productive as possible.
“Flexibility is part of the package, but it’s only one aspect,” Edwards said. “Flexibility helps with managing operational changes but having a break in your lease is some way down the list compared to broader objectives for tenants, including learning and dissemination of knowledge within their team, organisational culture and retaining and attracting talent. Creating space that facilitates these things alongside better working flexibility is, I think, going to matter more for tenants than having a break.”
Providing productive workspaces on lease terms that take stress away from tenants is going to help everyone in the long term. There is a huge need to get the UK economy up and running, with as many businesses in a fit shape as possible. Now more than ever is the time for landlords to work hand in hand with tenants to keep buildings occupied.