With central London’s office vacancy rate now at just 7.5%, the lowest in four years, there remains a lack of good quality stock.
This has led businesses to consider their ‘stay-put’ strategy. However, with over 4.5 million sq ft of active demand currently consisting of occupiers who have been at their existing premises for at least 15 years, much of it may not be fit for purpose.
For many, a lease renewal can make the most sense given the rise in operational expenditure (opex) and fit-out costs. So, how would a landlord go about making the necessary changes to their building so it can meet the needs of the occupier?
A collaborative partnership between an occupier and landlord is critical in order for a strategy to be agreed. Whatever the goal, both the landlord and tenants respective teams must work together, be it to agree energy pathways, an increase in amenity provision, or works to the central plant of the building.
For instance, an energy or sustainability pathway can only work if both parties align on the outcomes, the timeframes for implementation, and perhaps most importantly who is picking up the bill. This could include capital contributions or reduced periods of rent to offset costs/disruption, increased rents to contribute to building upgrades or improvements and clarity on dilapidations and reinstatement agreements. At the end of the day, both parties should benefit from an improved building, such as a reduction in energy consumption that will allow landlord and tenant to track progress towards their individual net-zero aspirations.
What’s more, there is no need to wait until the next lease event to put this plan into practice. By working together, they should be able to work outside of the confines of these dates and create new lease structures that work in everyone’s favour.
The level of any works will be balanced on how long the occupier wants the building to support its operations, against the landlord’s future strategy for its investment asset. Works that may need to be undertaken can cover everything from decarbonisation, social value initiatives and amenity provision, to upgrades to common areas. Both parties ultimately need to decide and agree what is important and then choose a solution that delivers this for everyone.
Some things are more difficult than others, such as decarbonisation and upgrading the central plant. This can be challenging and complex from an engineering perspective, but with cooperation between the occupier and the landlord the risks and costs can be mitigated.
Realistically, undertaking significant works is not always practical when the building is occupied. In some instances, the ability for a landlord to ‘swing’ a tenant out of a building while upgrade works take place on its existing premises could provide a creative solution. Clearly this is easier for those landlords with larger portfolios (that might have suitable vacancy), or those that own flex providers (where existing tenants can get first dibs on availability).
For the occupier, those that have a handle on their occupancy data could establish periods of flexible working for its staff, utilising working from home or other locations to minimise business disruption.
Ultimately, in a supply constrained market where opex and capital expenditure remain under inflationary pressure, occupiers are focused on their real estate requirements in relation to their return to work policies, and landlords are dealing with lower asset values, it is now more important than ever to cultivate real landlord and tenant partnerships.
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