Office leases are getting shorter
Coronavirus is amplifying demand for more flexible commercial real estate
In Hong Kong, an average office lease lasts three years. In the U.K., it’s six. In the U.S., it fell 15% in the first five months of 2020 to seven years — and it’s likely to fall farther.
The trend toward shorter leases is riding an accelerated trajectory as office users exercise caution and avoid making long-term decisions in the age of COVID-19, says Ben Munn, Global Flex Space Lead, JLL.
“Corporations want the ability to react to a host of unknowns brought on by the coronavirus and economic pressures, so they’ll continue to pursue office space options that provide them with enhanced flexibility for the foreseeable future,” he adds. “Whittling down lease terms is certainly part of that effort.”
So far, office occupiers approaching the end of their lease are the primary drivers of the term reductions. Rather than searching for new space in such a fluid environment, corporations are choosing to renew or extend leases. Renewals as a share of leasing have jumped to 51% from 29% pre-COVID, according to JLL data.
“Given the level of uncertainty with respect to the economy and the pandemic, tenants are seeking more agile office solutions,” says Scott Homa, Director of U.S. Office Research, JLL. “At this point, they’re generally taking the path of least resistance by extending work-from-home programs and avoiding new long-term lease commitments.”
Many occupiers that hadn’t incorporated flexible office strategies before the virus may explore them in the future as a way of maintaining a more fluid portfolio, Homa says. In addition to shorter lease terms, practices may include coworking memberships, suburban outposts and shifting some employees to permanent work-from-home arrangements.
These trends are certain to challenge office markets, Munn says. But landlords that recognize and fulfill office users’ desire for agility will be best positioned to thrive in the future.
“A mix of traditional and flexible space is becoming even more important to office occupiers looking to make the most of their commercial real estate portfolios,” Munn says. “Having said that, we still expect companies to base site and occupancy decisions on productivity, innovation, collaboration, workforce recruitment and retention, as well as other financial and strategic objectives.”