How long is long term?

Conventional leases are beginning to mirror the flexible way of working that occupiers are embedding into their business plans. This is a move away from the previously long term business forecasting which has always been synonymous with long term leases. The 15 plus year leases, commonplace in the 1970s and 1980s, have since been superseded by short term flexible leases. IPD’s UK Lease Events Review in November 2014 shows that the average lease length has remained under 10 years since 2002 with as much as 82% of leases taken in 2014 being for a term under 10 years. The table below shows the general trend was steadily decreasing on average until 2011 but has increased gradually since with the average lease length rising to 6.8 years in 2014. Despite this recent increasing, there has still been a significant fall in the average length of a lease, both from 2002 and even more so from the 1970s.

 

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 Source: IPD

The recent economic downturn naturally resulted in companies exercising more caution when it came to the commitment of leasing office space, and inevitably those who could afford to take leases were in a strong position to negotiate the more flexible terms of break clauses. These breaks reduce the risks associated with taking long term leases as they enable flexibility of growth as occupiers are able to upsize or downscale their spatial needs. Break clauses are still present, but with a strengthening economy and market are becoming less common in leases of under five years. However, confidence in committing to longer than 10 year leases has not yet returned, and the increasing popularity of short term flexible workspaces such as hot-desking, co-working and serviced office space, suggests it may never quite return to how it was. This does not necessarily show a weakness or redundancy in the market, more a shift in the way people are occupying and utilising space.

With the demand for fag-end leases being high, and the supply low, there is a rising confidence in vacating leased space early in favour of relocating to space which is more suitable to the company’s present needs. This can also be advantageous as it facilities a quick turn-around for a new tenant as the previous client’s fit-out can remain, creating a plug-and-play space. The ability to secure space without long term commitment means long term business plans take on a flexibility and reactivity, not always previously conceivable. There is still a level of risk in taking on a conventional lease, and in London especially it is currently a landlord’s market. But the confidence shift from taking 15 plus year leases to 5 – 10 year leases is resulting in the conventional lease taking a step into the flexible solutions arena, and the long term business plan transforming into the flexible term business plan. 

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