The Lease Is Dead. Long Live The Lease

It’s a valid point. Are we witnessing the slow demise of the traditional lease for small offices? Cast your mind back 20 years. 10. Even five. It was never like this was it? Is the co-working, collaborative, flexible, serviced office model slowly assigning the old-school lease to history?

The idea of serviced offices evolved from travelling salesmen in the major American business cities who needed somewhere on the road from where to make their calls and the delightfully British tradition of barrister’s chambers where they would band together, pooling resources and sharing clerks and expenses.

Fast-forward to today and the flexible workspace statistics* are staggering –

• The central London market has grown by 67% in just 10 years
• The UK market accounts for 36% of the global market
• There is over 5,000,000 sq. ft. in central London
• The 2017 UK flexible workspace sector is worth £16bn1
• Estimates suggest the market could be worth as much as £62bn by 2025**
• Some estimates predict that 30% of office space will be co-working space by 2030

*Source: GKRE: The Flexible Workplace Market, November 2017
1 using traditional valuation methods
** Report by Capital Economics Ltd

The Capital Economics report went on to note the three key drivers fuelling such growth – an increasing number of growth businesses, the expansion of key sectors that use serviced offices the most and the ever-growing trend towards more flexible working.

At which point, the question becomes an even more urgent one to answer. Are we witnessing the slow demise of the traditional lease and if we are, what do we do about it?

Slow, Cumbersome, Inflexible…

BDGSP partner Greg Porter, who most certainly cannot be described as above, illustrates the issues we face as commercial property professionals and offers up a solution.

The problem is that comparatively small conventional office leases lack appeal, principally down to the ease of access and the speed of the deal. New and existing businesses with entrepreneurial ambition are being turned off by the (in most cases, unnecessarily) lengthy, protracted legal processes, unnecessarily long leases, draconian landlord & tenant relationships which have the amazing ability to alienate the tenant (the landlord’s customer) and a maze of approvals, consents and wayleaves.

All these guys want to do is get on with the business of running a business and it doesn’t take a brain surgeon to see why they are running, open-armed, into the embrace of the serviced office providers. View, sign up, plug in and start working. It really is that simple.

There are plenty of old-school landlords who need to be aware of (and respond to) changing demand before it’s too late. Grosvenor and Howard de Walden Estates are adapting to a certain extent with easy to execute wayleaves for voice and data installations but still require complex ‘belt and braces’ leases, mainly driven by the UK property valuation model.

Is This The Solution?

Shorter, simpler and more flexible leases could be beneficial to landlords as they will result in shorter rent-free periods and may even reduce marketing voids with quicker lettings. If you can occupy space on a renewable licence then what is the purpose of an overbearing, complicated lease?

For landlords, one of the most attractive potential benefits is that they would be able to pick up on reversion periodically in a rising rental market. They are afforded several bites of that particular cherry by renewing and re-letting more often rather than the current norm of having to wait until the fifth year of the lease, which, as all investors are acutely aware of, is a lottery as the date can miss the rental growth cycle.

What Can Be Done?

There are some traditional landlords and institutions who are addressing flexible leasing in a reactionary way and clambering about the bandwagon but the product and service offering still falls way short of what’s needed. One reason for the shortfall could be the UK valuation model which is fixated on length of tenure and income stream, with the actual bricks and mortar real estate sometimes disregarded.

In order for landlords to have more confidence in short-term income which has shorter voids and the ability to capitalise on reversion periodically, this needs to change.

There is growing demand for residential PRS, by virtue based on short-term income for which current yields are fairly sharp, so why can’t it work in the same way for offices?

Businesses like We Work are taking a tech-based approach to occupational real estate by continuously processing data on their customer base, a far better way of predicting the future performance of a property than waiting and wondering what might or might not happen at the end of a tenants’ 10-year lease…

As always, we’d love to hear your thoughts. Where do you think the traditional lease is going? Status quo or a paradigm shift in how we do what we do?