Commercial Lease Lengths at Historic Low

Posted on 4 February, 2014 by Cliff Goodwin

With commercial landlords forced to offer greater incentives to attract tenants during the financial crisis, lease lengths have fallen to an historic low Prop-Search reports.

Prop-Search surveyor Samantha Jones

Prop-Search surveyor Samantha Jones

More than 80 per cent of leases signed in the year to June, 2013, were between one and five years. “The continuing tough trading conditions have driven down lease lengths and increased pressure on landlords to offer competitive terms to occupiers,” said Samantha Jones, a surveyor at the commercial property agents.

As the economy begins to pick up entrepreneurs and start-up business have been able to negotiate shorter leases and demand greater incentives. Less than six per cent of leases go beyond 10 years, compared to twice that number only five years ago, and more than 20 per cent a decade ago.

And the sheer number of short leases has meant the average lease length, excluding breaks, has now fallen to under six years for the first time, standing at 5.8 years, according to a nationwide survey by real estate analysts, IPD.

The study also showed that as well as shorter leases, landlords increasingly needed to incentivise during the recession to secure lettings.  Rent free periods across all sectors are now the norm, with office leases offering the longest concession at just over 12 months and there is growing evidence, that retail and industrial landlords are also making use of rent free incentives, although for shorter periods.

The distribution of rent free periods is skewed towards shorter leases, perhaps compensating for a high rent charged for a shorter income stream.  There are however distinct differences between the sectors.

“Rent free periods are being offered commonly on relatively short leases in the retail sector, perhaps to mitigate landlord’s business rates liabilities,” explained Jones, “whereas offices buck this trend with more rent moratoriums granted on leases of between nine and 12 years, than shorter tenancies.  The lowest level of incentives has been within the industrial sector.”

There is, says Jones, a parallel between the improving economy — with its pick-up in employment, consumer spending and trade — and the competition among commercial landlords to attract tenants by offering the correct pitch, location and configuration. These will almost certainly appeal to tenants being offered less flexibility in their lease terms and a reduction in the allowance for break-options and inducements.

“It is the landlords’ prerogative to try and minimise such lease events that might threaten their income in what remains an unpredictable economic landscape,” concludes Jones.  “However, the outcome is diverse — varying between property type, sector and location — and with prime locations and quality buildings clearly outperforming and leaving secondary locations and inferior buildings to their fate in an occupiers market ”

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