Home Commercial Property Why London’s commercial landlords must get creative to halt plummeting revenues

Why London’s commercial landlords must get creative to halt plummeting revenues

4th Jul 23 5:21 pm

Commercial property has reached a precipice. The decline in office value forecast at the end of 2022 is being realised and significant losses suffered as a result – with the likes of British Land reporting a pre-tax loss of £1bn this week.

Rising inflation and widespread budget crunching are leading major companies, including Meta and John Lewis, to leave their offices behind. But others are not so ready to turn their back, with JPMorgan Chase and Amazon among those publicly advocating for a mass return.

Office leasing demand has not bounced back to pre-pandemic levels, as many optimistically suggested it would. But landlords can no longer bury their heads in the sand. To survive, they need to embody the same flexibility as the companies they’re selling to, while recognising they are no longer just competing against each other, but other workplace solutions, many of them digital in nature.

While the backlash to suggestions from the likes of Jeremy Hunt for a reset to office “default” proves there is little desire for such a full-time return, less than a third of workers want to go fully remote and 72% of leaders see the office as an essential hub.

There is still a thriving demand for office space. Yet empty office space has risen by 65% in the past three years.

The spoke in the wheels for commercial landlords is not lack of demand, nor supply. It’s that this demand has changed shape. And the current offering itself is no longer fit for purpose.

While the needs and practices of the UK’s workforce have evolved beyond recognition since the pandemic, office leasing is stuck in the past.

From long-term leaseholds, to full-time contracts and inflexible spaces designed to serve a single, rigid purpose, most available office space is not tailored to our post-pandemic working needs. Companies are adopting a vast spectrum of practices, with “fixed-”, “remote-” and “flexible-” hybrid working covering an almost endless list of variations. Some use the office for one day a week, others for four, others let employees come and go as they please. There is no longer one-size-fits-all. A singular, fixed five-day office lease simply cannot match this new flexible, diversified need.

The very definition of the purpose of an office has irrevocably changed. Businesses no longer require an office from which to operate. In order to be justified, an office must deliver an increase in productivity higher in value than its own cost. These productivity gains can be delivered through increased staff attraction and retention, better collaboration, and an improved sense of belonging and purpose. Businesses today want all of those benefits from an office space to facilitate increased productivity, while also looking to reduce the cost.

They are voting with their feet. With many seeking renewed cost-cutting measures amid the rising cost of living, money wasted on empty office days – which costs business up to £190,000 a year – or on office space that does not serve their needs, has been a justified spend to cull. Many are giving up their office leases and looking elsewhere for a space that more accurately reflects their needs – and which they only have to pay for on the days they want to use it.

And they are finding them. A select few landlords have begun to strike out ahead of the curve and flex the way their office space is both set-up and made available. Whether that’s through offering part-time contracts or facilitating hybrid office sharing to enable multiple companies to benefit from the same space on different days, this fluid approach is unlocking a more flexible, reliable stream of revenue.

Those embracing this innovation are also providing more intuitively designed spaces, which are able to adapt to cater to a wider, more diverse range of workplace activities. The office is no longer simply about desks and boardrooms – it has to be a space worth leaving home for.

As this shift in office leasing continues to grow, those that refuse to flex and adapt will ultimately be left behind. At Space32, we’re seeing a significant rise in demand for more flexible office leasing, with two-thirds of businesses looking for alternatives to a full-time contract.

To fill empty office space and recover falling revenue, it’s no longer possible to rely on securing contracts with full-time occupiers, who will pay five-day rent and adapt their working schedules to suit the space provided. Instead, landlords must realign their assets to reflect the realities of the hybrid working era.

This means rethinking the way spaces are provided and the types of contracts which are offered, with room for variation in the way they can be used and rented. We must enable companies to rent office space on their own terms, providing contracts which enable the diverse range of practices being pursued, such as empowering tenants to sublet their own spaces to other businesses.

Commercial property leasing may well be at a crossroads, but landlords have an opportunity to re-shape its future for the better. The only route to reliable revenue is in meeting the evolved needs of the companies seeking out office space. And to do this, the only option is to adapt.

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