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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.
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