Out of Adversity Comes Opportunity

Posted by Colliers on 26th July 2021 -

The pandemic has transformed the way in which office space is being used. Amy Bracey head of the Business Space Lease Advisory in the South West shares some of the conversations she’s been having with occupiers in the area. 

Unprecedented is the word that defined 2020. The directive from the Prime Minister, Boris Johnson, on 23 March 2020 for the public to stay at home resulted in remote working becoming the norm for most office workers overnight, leading to speculation as to whether this could spell the end of office accommodation and demand as we knew it. 

For any of us old enough to remember the 2007-2008 financial crash, the prospect of a repeat was concerning – but happily Bristol was in a much stronger position than 13 years ago, partly due to a lack of available office supply.
 

Vacancy rates

Before the financial crash, Bristol had experienced high office vacancy rates due to a surge in new developments. Examples include 3 Temple Quay (more than 105,000 sq ft) in 2005 and 10 Templeback and Portwall Place (both more than 120,000 sq ft) in 2007 and 2008 respectively. By comparison, before the COVID-19 pandemic, office vacancy rates were at just 4.9% - a rate that rose to 6.6% in Q1 2021. During the lockdowns, Government support schemes such as tax relief, eviction bans, cash grants and the furlough scheme helped to keep many businesses solvent.

Once initial teething issues had been addressed and businesses had adapted to a working from home routine, it was encouraging to see that, for the most part, output was not severely impacted. However, the discovery that business continuity and employee productivity did not depend upon working from an office made some companies question whether it was justifiable to renew their leases or whether a permanent shift to flexible working was more appropriate. 
 

Human interaction

Any initial concerns about the future of the office market have, however, been quashed – as what has become clear is that there is very much still a need for collaborative space and that human interaction is as important as ever.

So, what does all this mean from the perspective of Business Space Lease Advisory? 

We expect demand for office accommodation to continue, albeit some will look to consolidate or take smaller suites. We suspect the pandemic may, however, spell the end of permanent desks in the office, paving the way for more exciting and imaginative collaborative space where relationships are strengthened, and innovation nurtured. 

Lease regearing provides three approaches which are proving to be particularly popular.
 
Selling breaks: If an occupier doesn’t need to retain flexibility, the removal of a break clause can improve the landlord’s investment value; in return for some level of rent free – it can be win-win!

Longer term certain: A trend of shorter lease terms is emerging. Pre-pandemic a 10-year lease with a break at year 5 was commonplace. We are now witnessing an increase in the need for flexibility from office occupiers, which creates an opportunity for a tenant who can commit to a longer-term lease. Longer leases improve landlord’s investment value and so tenants should be entitled to share some of that benefit, by way of a rent free period or other appropriate incentives. 

Reversionary leases: For occupiers who know they want to stay in their premises beyond expiry, landlords have been accommodating the early agreement of new leases in exchange for a rental incentive which can be enjoyed immediately. This is a great way to give a short-term cash flow boost, whilst improving the landlord’s investment value.

As Benjamin Franklin famously said: ”Out of adversity comes opportunity”, and this is also true of the pandemic. With companies taking stock of their position and reassessing their business plans, there are opportunities for occupiers who can commit to longer term plans for their office accommodation. Whilst we are not out of the woods yet, the benefits of having a place where employees can collaborate are becoming apparent– and many landlords are ready to work with tenants to realise this value. 

About the Author: 

Amy Bracey is head of the Business Space Lease Advisory team in the South West, who regularly advises occupiers and investor clients on lease events. She specialises in offices, industrial & logistics as well as healthcare assets. She is also an experienced third party for dispute resolutions. 

Contact Amy by emailing [email protected]