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Flexibility and pace will help landlords secure occupiers in 2024

Empty commercial office cubicles

As we start a new year, there are signs that caution in the UK office leasing market is set to continue into 2024.

While the UK – and London in particular – continues to act as an essential hub for sectors including financial services, consultancy and tech, businesses in these markets remain cautious around office occupancy. The news towards the end of last year that EY was considering moving from its London Bridge campus is just one of many examples showing that corporate occupiers are continuing to weigh up their options.

The current cautious market is a result of many factors such as increasing business overheads from salaries, rising energy costs and interest rates making borrowing difficult. These are, however, familiar effects of the cyclical nature of the real estate market. The wider culture shifts of hybrid working and occupancy patterns that started with the pandemic have also taken a long time to settle and we’re still seeing the market adjust. While parts of the banking and capital sectors have, to some extent, established a bar for hybrid working, many other occupiers such as professional service firms are still to land on a fixed model.

Despite this, deals are happening and opportunities for landlords are there for the taking. However, the balance of the owner – occupier relationship has shifted and there is now a greater need and emphasis on landlords to proactively drive deals forward.

Looking ahead, property owners need to be realistic about both the quality of their space and their own priorities. Landlords need to recognise what occupiers are after and act quickly, understanding what each deal needs.

Building in flexibility to leases

The overriding priority for occupiers currently seems to be flexibility. This can include provisions for shorter leases or break clauses that could allow for a wholesale move, but also potential flex on the amount of space within the same location. As occupancy rates fluctuate, the ability to change the type and location of office space with minimal penalty is particularly appealing.

While this might feel like favouring one-sided deals in favour of occupiers, there are potential pluses for landlords too. Portfolio managers may welcome this same flexibility when they look at the need to upgrade assets in line with growing sustainability requirements. A series of deadlines in 2027 and 2030 for increasing energy performance through the Minimum Energy Efficiency Standards (MEES) regime is expected to trigger a wave of refurbishments: having the flexibility to manage lease breaks is likely to be helpful in some cases and could avoid a tricky situation down the line where space is no longer found to be fit for purpose.

The market may shift back to longer-term agreements in the future, but lease negotiations are likely to hinge on flexibility for now.

Time is of the essence in the occupier sector

The other key driver to getting deals done in this market is speed. Time is of the essence to convert initial interest into set-in-stone agreements. Hesitancy could see tenants drift, lose confidence or be tempted by other offers.

Efficiency is crucial at this stage and success will rely on parties being clear on their priorities from the outset and foreseeing any possible points of contention. This will prove to be more time-efficient in the long run. More and more we’re seeing greater emphasis attached to establishing solid Heads of Terms – clearing hurdles and improving the likelihood of striking a mutually satisfactory deal.

Overall, the office market remains a dynamic sector and, while longer leases may see an eventual return, property owners should be firmly focusing on flexibility and pace to get deals finalised.

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