Are We Seeing The End of Long-Term Office Leases?
For many businesses, the costs associated with having a physical location to work from and the overheads associated with these hinder their ability to invest in innovating and much more. Especially in London and other major cities where the cost per square foot of office space is outrageously high, many businesses struggle to survive because of these fixed costs alone. Coupled with an extremely competitive business environment, it is no wonder that many small businesses fail within the first few years of starting.
A solution has been popping up in many cities and towns to help businesses lower their rental costs. Many larger offices now sublease excess space to individuals and small businesses, allowing them to maximise their space efficiency, and allowing those who would usually be unable to afford to rent office space on the normal market. This could be seen as a threat to the landlords who keep rents high and require long-term contracts. A good example of the declining popularity of long-term leases is in the popularity of for-hire meeting rooms and offices spaces with room booking systems, through companies such as Regus and We-Work. Many businesses don’t see the advantage of having dedicated meeting rooms or office space, when they can just rent one whenever they need to.
In this day and age, innovation and the business climate change very quickly, and those who struggle to adapt and pivot in response to these changes are the ones who get left behind. Recent history, for example with Blockbuster and Sears, show us that even the biggest names can fail, especially if they do no react quickly enough. In London, for example, while rental prices are still very high, many high-street spaces are becoming vacant ghost-towns in part due to business failures and high rent. Landlords must learn to also adapt to environmental changes, or they will end up with valuable, but vacant properties.
Long-term leasing may still be favourable for many parties, as it usually allows for lower rental prices in exchange for a long-term guarantee of income, but to expect many businesses nowadays to agree to it would be foolish. It would be wise for landlords to be more flexible with their lease terms, as while they may make less from rent, it is still more than zero if their place is vacant and becomes a liability rather than an asset.
We are starting to see vacant commercial spaces around town, being used as pop-up shops, where they are rented out for a short period of time, to food stalls and stores, many of whom are doing so to test out the market without the long-term obligations. Landlords who are able to see and adapt to these market forces will surely survive, as will their tenants.
While it is clear that long-term leases are in decline, it doesn’t look like they will completely disappear anytime soon. If anything, many short-term leases are actually a sub-lease of a long-term lease. Businesses and landlords however should not be complacent and should always be aware of the internal and external forces.