Shift to longer office leases as flexible work beds in

Wednesday, 17 July 2024

Office tenants are signing up for longer lease terms again, after a sharp move away from them post-Covid, and it reflects an adaptation to working from home, Re-Leased says.

The average office lease increased by 29% annually to 35 months, or nearly three years, in the first quarter of this year, new figures from the commercial property management platform show.

That was up from 27 months, or two years and three months, over the same period last year, and edging closer to the lease term of 43 months, or three years and seven months, recorded in early 2019.

Leases that were for between one and three years accounted for 45.5% of the market in the first quarter of this year, up from 35.6% in the first quarter of last year.

Last year’s figures showed demand for short-term leases had surged, with agreements of under 12 months making up 45.21% of all leases. But this year short-term leases accounted for 29.8% of the market.

There was also an increase in demand for leases that were for longer than five years. They were 13.9% of the market this year, up from 8.42% last year.

Re-Leased chief executive Tom Wallace said it is a big shift from last year, and one of the drivers behind longer leases was that businesses were more aware of what their office space requirements were now.

Changes around working from home have settled, and most businesses had found the level that was right for them, he said.

“In contrast, over the last few years working from home patterns, and hybrid working arrangements, were was still being established, and businesses were not sure of how much space they needed.

“Now, they know what they need from their offices, and can make longer term commitments.”

But there were other drivers behind the shift, including the pronounced flight to quality trend.

There was high demand for prime office space, and a limited supply of it, so when businesses find a high quality property they want to lock it in for the long term, he said.

“Landlords are also more willing to come to the party in terms of securing tenancies. The tougher economic environment means landlords want to make sure their spaces are fully occupied.

“Their focus is on signing up good tenants for longer, and looking after their current tenants, rather than squeezing the absolute most in dollar value from every square metre.”

That meant landlords were being more flexible in negotiations, and could be offering fit-outs, rent-free periods or even lower lease costs to avoid having empty space.

Wallace said another clear trend was that it was much harder to fill secondary office space, and vacancies in that part of the market had increased significantly.

Tougher economic times were not the only reason for that, he said.

“Office space is competing with the comforts of home, or not computing to attract employees back. It is a hard sell for employers to say ‘come to the office’ when the office is not a nice space.

“That’s led to a drop away in the secondary office. Some landlords are responding by investing in their space to make it more attractive, because if they don’t people won’t lease it.”

The trends highlighted by the report, which was based on data from over 40,000 active tenancies on the platform, were consistent across the main centres, he said.

Office markets in Australia, the UK and particularly the United States have been struggling to deal with high vacancy rates recently, but in New Zealand the sector was faring better, commercial property experts have said.

While some big corporates had downsized offices, and others were moving, there was still strong demand for premium office space.

JLL head of office leasing advisory Ross Bolton said corporates might be consolidating their footprint because less staff were in the office all the time, but they were spending more on high-quality premises.