We were already heading towards the adoption of flexible working practices for businesses and more flexible rent and leasing arrangements across the retail and office sectors. However, the Covid-19 crisis has accelerated the rate of this change.
To recognise the cultural shift towards remote working and to mitigate exposure to ongoing fixed rental liability, there is already occupier pressure within the market for greater flexibility in occupational arrangements. In particular, there is already pressure for shorter fixed-term lengths, enhanced rights to exit fixed-term arrangements and more widespread adoption of turnover-based rents.
There are three main challenges for landlords. First, to innovate to offer occupational structures that satisfy both market demand for flexibility and often archaic lending criteria. Second, to sufficiently monetise the flexibility required by occupiers. Lastly, to distinguish their offering through additional benefits or services designed to enhance efficiency or reduce usual office overheads, as well as the additional flexibility to ‘right-size’ space to meet changing demands.
In the retail sector, there will be more of a link between revenue of tenants and rent, with landlords being challenged to create more reasons to visit a retail destination to generate ever-higher footfall.
In terms of the serviced office model, we may begin to see more widespread collaboration between landlords and existing serviced office operators, reducing capital outlay and risk for the operator and providing the landlord with a tried-and-tested product. We have also seen co-working providers marketing the proposition of two companies taking one office between them and splitting the use of the space, which not only allows the businesses to split the cost but enables landlords to maintain their rent revenues.
The landlords that are best able to keep their proposition relevant in the post-pandemic era will have the greatest success. Banks’ lending requirements will, however, need to soften significantly to allow for widespread adoption of these more flexible arrangements.
Mark Byrne is director in the real estate team at Walker Morris