One aftermath of COVID-19 has been a requirement for versatile, short-term leases from landlords. The balance has shifted. Advantage: tenant. Now landlords are faced with exploring lease options which will entice the rental market.
Covid-19 has disrupted business and is accelerating the momentum of trends that were shifting even before the pandemic. Unpredictable growth and contraction, non-traditional work settings and schedules, and a sense of security are now drivers of flexibility in the warehouse and commercial rental markets. In this new environment, tenants are starting to look beyond their traditional building preferences, they are gravitating towards rental spaces and properties that best solve for flexibility, adaptability, and well-being. In parallel to changes in tenant expectations, many landlords are now querying whether long leases can guarantee incomes in a world increasingly afflicted by pandemics.
Tenant-Driven Real Estate Pre Covid-19
Even though the covid-19 pandemic has accelerated the demand for greater flexibility, the shift towards tenant-driven real estate was already gaining traction before the pandemic. Small businesses and commercial property leasing are two important policy areas for the UK Government. Hence, it’s been promoting flexibility and selection in industrial leases as a part of a wider enterprise and productivity agenda. Once Airbnb dramatically modified the model for travel rental properties, it sparked a growing want for flexible rental and leasing arrangements throughout the real estate industry. However, there is one fundamental shift we have never seen before: landlords entertaining far more lease flexibility than they historically offered.
The Balance Has Shifted
Generally, in modern life, tenants prefer to sign shorter-term leases over the typical long terms that landlords require. Over the past few months, for the first time landlords have started directly advertising open spaces. Whereas these sorts of conversations happen all the time between tenant representatives and building representatives, the balance of power that has clearly shifted now, with landlords initiating discussions regarding lease flexibility that go against their typical want for long leases. Versatile lease terms can be a major drawcard, particularly in these difficult economic times. Covid-19 has already forced nearly every landlord to develop their plan to welcome new tenants, those demanding flexibility, into their vacant spaces. Rather than an easy “No,” the flexibility question is now being answered with another question, “What would work best for you?”
For many like Matt Whittaker, a logistics property expert from Bis Henderson Space, flexibility is a bulwark to uncertainty. “Most businesses, our clients included, don’t want or need vast new empty sheds. They need operational, workable space that they can move into and use from day one, to accommodate increased inventories of raw material, work in progress, and finished goods but also for kitting, picking, packing, returns processing and a host of other tasks…. Their current requirements are strictly tactical – they need to be able to move out again as strategies become firmer,” Matt noted.
Changes in Tenant Preference
Tenants’ requirements for corporate real estate have changed in recent years in response to their changing work practices. According to a 2020 report produced by Savills, Corporate tenants now seem to be seeking larger properties in London. Rents across prime London fell by an average of 2.0% in the three months to June 2020. North and East London and prime central London saw the largest rental falls over the past quarter of 3.6% and 2.8% respectively.
As people start returning to offices and companies feel more confident in the economy, we should see demand continue to recover and the profile of corporate demand widens again. However, for the moment, this means that owners of rental spaces, who have historically benefitted from such corporate demand, need to take a pragmatic view on asking rents.
Similarly, JLL explored the expectations of a growing logistics and warehousing space, particularly as there is less demand for central locations. It appears, as more renters look to escape the city commute and work from wherever they choose, the future of the city centre has been called into question.
Tips to Improve the Flexibility of Your Lease
Even if your company has a well-constructed strategic plan, we now know the future is never entirely certain. Lease terms that give the flexibility to expand or contract business operations could be vital to a business’s chances of survival in uncertain times. So how should a tenant and landlord go about improving the flexibility of their lease to better future proof their businesses?
Keep Things Short Term
The shorter your lease, the simpler it should be to get out of. If you’re having difficulty pinning down your future business needs because your company is in a period of transition, a short-term lease is likely the best solution for your needs. Although your landlord could also be less willing to create concessions throughout negotiations with a shorter term, you will not be locked into an agreement for a long period of time.
More significantly, There’s no penalty to a tenant for terminating a short-term lease with the proper notice. Most landlord-tenant laws need a minimum of a 30-day notice to terminate a month-to-month lease, and therefore the rental agreement can specify what quantity notice is important and the way the notice is delivered. It may be terribly costly for a tenant to interrupt a long lease, and therefore the tenant could also be chargeable for paying the rent for the remainder of the lease if the owner is unable to search out a replacement tenant. The short notice required to terminate a short lease will facilitate to get rid of any hesitations a tenant may have about renting your place.
Add a Subletting Clause
The subletting clause in a lease agreement is a crucial clause in most lease negotiations. Subletting clauses can provide a tenant with a great deal of flexibility. These clauses allow the tenant to rent part or all of your space to another tenant. You may need to sublease or assign your space if your team shrinks, you suddenly need to relocate or you begin to allow employees to telecommute.
When unforeseen circumstances arise, a tenant may look to negotiate an early exit of the property. However, for a landlord, this is not ideal. Losing a tenant means losing a reliable source of income. Landlords will be forced to go looking for a replacement tenant, and so lose profit as a result if you’re unable to search out one quickly. In this sense, allowing a sublease means possibly avoiding a rental vacancy and lost rental income.
A tenant ought to additionally think about negotiating for early termination rights just in case its business is littered with future downturns or health crises. An early termination option affords the tenant the right to terminate the lease in its entirety prior to the stated expiration date. Generally, the termination option cannot be exercised prior to a specified date. As an example, if the lease features a 10-year initial term, the termination possibility can’t be exercised before the fifth anniversary of the commencement date.
The tenant sometimes must give a termination notice well ahead of the termination date, so as to afford the owner ample time to re-let the premises. If the tenant fails to vacate the premises by the termination date, the tenant is going to be deemed to be a holdover tenant under the lease. Landlords can sometimes raise the tenant to pay a fee to exercise an early termination option. This termination fee may be several months’ rent.
If the landlord refuses to allow early termination options, the tenant can get creative with the lease term. Instead of agreeing to a five-year term, the tenant can ask for a two-year initial term with three renewal options for one year each. This primarily offers the tenant 3 opportunities to choose whether or not continuing with the lease is smart.
Right for improvements
Most leases and rental agreements contain a provision that prevents a tenant from making improvements or alterations to a rental unit without getting the written consent of the landlord. If you make an improvement without consent, it generally becomes the property of the landlord if you leave. This is because anything attached to the rental property is a “fixture,” which cannot be removed. You should think twice before attaching an item that is important to you to the wall or floor, or at least talk to the landlord about it first. You may need to persuade the landlord that you will restore the property to its original condition when you leave, or cover the cost of restoring it. Try to put any agreement that you reach in writing. If not, it is usually safe to decide on renter-friendly improvement.
Overall, businesses are navigating uncharted waters at the moment. As they get further down the path of recovery, they may really not know what kind of space and footprint they need. Sadly, for landlords, the short- and long-term impact may be quite significant, from deferring or lowering rent to dealing with higher vacancies. The best strategy for landlords moving forward is to differentiate and re-tool their product for a post-covid-19 world. This means continuing to focus on tenant experience, which was already a growing trend. The ability to let short term facilities could be extremely attractive as a way to meet current needs without being locked in for the very unpredictable future. A revamped leasing method that addresses the needs of everybody ushers in the bright future for this evolving industry.
This article was brought to you by logistics and supply chain experts, Bis Henderson Space in Northampton (UK). The company provides access to additional storage and logistics services across the UK and Europe on both a short and long-term basis. You can connect with Bis Henderson Space via LinkedIn and Twitter.
Myles is a first class ‘word nerd’ currently working at the heart of the property industry. He’s particularly passionate about all-things property, interiors and D.I.Y.
Be sure to connect with him via LinkedIn.