62% Of Office Landlords Expect Valuations To Drop As Lease Terms Shrink
Office landlords and tenants both expect lease terms to be more flexible over the next five years than previous industry standards, according to a new survey by The Instant Group and Urban Land Institute.
Eighty percent of landlords and 75% of occupiers expect greater lease flexibility and agility in the near future, the survey found. As leases change, 62% of landlords are also expecting a decrease in capital values compared with recent valuation models, which tend to be based on longer-term leases.
Landlords are bracing for some reduction in office space utilization over the next five years. About 60% said the reduction will be “slight,” while 22% said it will be “significant.”
Over the next five years, 15% of tenants expect decreasing space usage. Over the next 12 to 18 months, 30% expect no change, perhaps reflecting the continuing uncertainty about hybrid work patterns, The Instant Group and ULI said.
The survey also found a disconnect between landlords and tenants when it comes to office amenities. Landlords said that a high level of amenities within or surrounding a building will be the No. 1 factor in space utilization over the next five years. Tenants cited offices that provide areas for collaboration as the top priority.
Less than 2% of landlords said they will be able to make the necessary capital expenditures to respond to environmental, social and governance-related requirements from tenants and regulations.
The survey also asked investors about their plans for the office sector over the next five years. Mixed-use developments will be a top focus, with 75% of respondents citing it. Rejuvenation of older office assets, as well as buying Class-A buildings, will also be important. There will be less focus on Class-B noncore office assets and Class-B prime.
The survey queried 285 office occupiers, landlords and third-party advisers in North America, Europe, Asia Pacific, the Middle East and South America, including interviews with industry experts and the findings of two roundtables.