We are seeing a shift in the balance of power between tenants and landlords. After years of having the upper hand in negotiations, landlords are now having to deal with tenants who expect more from their commercial space
It is a change that had been coming for a while, but Covid accelerated it, as businesses up and down the country operated remotely and were left wondering what exactly they wanted from their commercial space – or whether they wanted commercial space at all.
How should landlords adapt to the changing demands and changing needs of their commercial tenants? First of all, they need to proactively come to the table to negotiate. In the past, lease negotiations or renegotiations were often led by tenants looking for more favourable terms. That world order has changed. In order to fill their offices back up, landlords will need to approach tenants and ask them what they want from their office space. That might mean shorter-term leases with break clauses, or it might mean some other kind of concession or flexibility.
Landlords will also need to be more generous when it comes to office refurbishments. In the past, the thinking was that if a tenant wanted to refurbish their office, they would pay for it themselves. That assumption won’t wash with tenants who are considering whether they even need office space at all. What we will see more of is landlords putting their hands into their pockets to pay for a fit-out before the tenant moves in – creating a space on spec for a given tenant rather than giving them a blank canvas and telling them to fit it out themselves.
There is an old corporate idea that is truer now than it ever was: everyone wants an office like Google’s. For the companies that choose to take office space in future, only a Google-quality office will do
This desire for fit-outs will no doubt vary by tenant. Some will want a more hands-on approach from their landlord, while others will still want the freedom to do something themselves, and may be willing to pay for that freedom. Either way, there is an old corporate idea that is truer now than it ever was: everyone wants an office like Google’s. For the companies that choose to take office space in future, only a Google-quality office will do.
Attitudes towards dilapidations will need to change as well. After a year of office tenants and landlords scrutinising their leases more than ever before, both parties have become more aware of dilapidations. It has become a more frequent topic of discussion and more landlords are agreeing to more favourable terms with tenants, such as dilapidations caps on what tenants will pay.
All of these were at first seemingly short-term changes created by the pandemic, but they are here for the long term. Tenants simply won’t accept going back to the way things were.
We know this because we at Buzzacott have been speaking with all sides, offering consultancy during this pandemic. We’ve spoken with landlords that have had covenant breaches and now need to manage their cashflow. We’ve spoken with businesses that do office refurbishments and have never been busier. And we’ve spoken with a wide range of tenants that are more determined than ever to get the most out of their business space.
We’ve also spoken to agencies. From where they are sitting, there is still a huge demand for office space, but the space tenants are after is higher quality than ever before. Agents are also bullish about rental values. These have struggled in different markets across the country over the past year and a half, but many agents are confident they will bounce back again.
Of course, not all commercial space is office space, and the story with retail is a different one entirely. There has been a move to turnover-based rent agreements, but the stability of their tenants’ business model raises other questions for landlords. In secondary high streets, landlords may need to consider whether they want a retail tenant in that space at all or whether it should be repurposed into a new use.
None of this is a problem unique to London. Although the capital does sit in its own little bubble, the need for higher-quality offices is something landlords in cities across the UK will need to think about. Those regional cities also might have the opportunity to poach tenants from London as businesses migrate away from the capital in search of cheaper space in the post-pandemic world.
Those regional cities are suddenly very appealing from a cost perspective. While the nuances of the conversations happening in Bristol, Manchester or Birmingham will be different, the underlying conversations will be broadly similar. In most cases, it will be the tenant dictating the terms more than before.
What all this means for the future is becoming clearer as more tenants and landlords sit down to renegotiate leases. Firstly, there will still be demand in London and the UK’s other big cities. Working from home is a possibility and tenants will know that it’s something they can fall back on if they must, but it does not allow for socialising and collaboration in the way an office does.
What this means is that landlords will still have spaces tenants want, but covenants will be more flexible and allow tenants to use space more according to their own needs and desires. This level of engagement between landlord and tenant, working together to find a lease that works, was something we never had before. Now, though, the playing field has been levelled.
Buzzacott is a top 20 UK accountancy and business advisory firm with a reputation for supporting clients for over 100 years. Our Real Estate team provides audit, assurance and tax advice to businesses operating across the whole real-estate spectrum, including partnerships and property funds, and corporates that either own or occupy real estate or operate in the sector.
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Landlords must up their game to satisfy their tenants