Office lease terms plummet as tenants demand more flexibility

Tuesday, 11 July 2023

Almost half of office tenants signed up to leases of a year or less in the first quarter of this year, in line with a big drop in lease terms post-Covid, Re-Leased says.

The commercial property management platform’s latest figures show the length of office leases in New Zealand dropped by 37% between the start of 2019 and the start of this year.

The average office lease was for 27 months, or two years and three months, earlier this year, down from 43 months, or three-and-and-a-half years, in early 2019.

Leases that were for longer than five years now accounted for just 8.42% of the market, down from 21% in 2019.

But demand for short-term leases had surged, with agreements of up to 12 months making up 45.21% of all leases, compared to 20.40% in 2019.

The analysis was based on data from more than 15,000 commercial properties and 45,000 leases on the New Zealand platform.

Re-Leased chief executive Tom Wallace said there were a number of forces driving the increased demand for shorter, more flexible lease terms from businesses.

While the pandemic was now in the rear-view mirror, companies were still determining what their office requirements would be in the new world of flexible work, he said.

“Although more managers are pushing for a full return to office, it seems clear that hybrid work will remain in place in the near term.

“There is a clear reluctance to commit to a long-term lease, especially now that flexible office providers offer a suitable alternative, and there are more such workspaces out there.”

It meant that businesses had more choices, and did not have to sign up to long lease terms if it did not suit them, he said.

“On top of that, the economic downturn has left many business owners happy to take the opportunity to reduce their operating expenses, and not lock themselves into long leases in uncertain times.”

Some viewed the changed office leasing environment as cause for doom and gloom, but it offered opportunities for landlords and tenants to create better working environments, Wallace said.

“Landlords will have to adapt the way they operate as they are used to having long leases, with guaranteed income, in place, and this has allowed them to be pretty hands-off except when it is lease renewal time.

“Now if they want their tenants to stay for longer, they will have to make sure they are happy, and that will mean a more active management style, and ensuring they provide good amenities.”

But tenants generally wanted to stay in a good building for a decent period of time, and greater flexibility in lease terms meant there were lower barriers to getting them in the first place, he said.

“For tenants, there is growing push back towards the office from home, but to get their staff to return they have to make it worth their while, and worth the commute.

“So they need to think about how to best use the space available, and how to leverage new technology, such as air monitoring systems, to improve the quality of the workplace experience for their staff.”

There was some innovative use of space, such as collaborative work hubs which were like a cross between a bar and a library, going on, and he had also noticed a real trend towards “green buildings”, he said.

“But landlords who don’t adapt to the new environment, or those with lower-grade buildings that are not upgraded will struggle.”

JLL’s latest Office Market Snapshots found the trend of a diverging gulf between prime and secondary office space was continuing as tenants sought out properties that were better equipped to attract and retain the best talent.

And flexible workspace providers have said demand for their space was increasing as many businesses did not want to commit to leasing long-term office space in uncertain economic times, but had gone off the work-from-home model.