What will happen to office leases in 2021?

What will happen to office leases in 2021?

As businesses emerge from the pandemic, start looking forward to life after Covid-19, and consider what their workspace requirements are going to be, the key word on everyone’s lips is ‘flexibility’

If there’s one thing 2020’s global crisis has imparted to corporate real estate teams, it’s that they don’t want to be locked into rigid long-term contracts for office space when there are alternatives that are more conducive to the changing needs of their business.

What does flexibility mean exactly? For a start, it means having a range of choices as to what type of contract you require for your office space: whether you have a dedicated space, a space shared with another company, or even capacity for a number of individuals in a coworking environment. And it can also mean having the ability to add extra space as and when it’s needed. In all its forms, flexibility will be one of the most significant drivers for office tenants in 2021. 

Enhanced agility

“There’s no need to hold on to expensive space you’re not using just in case you need it one day, and you never have to pay a penalty if you need to give space back,” explains Amanda Lim, head of flexible office solutions at Knight Frank. In the coming years, agile solutions will be more crucial than ever as companies navigate opaque business landscapes and the realities this might present a workforce. “This is much more efficient for scaling up and down at short notice, which is what we find modern businesses need to do.”

As a result, brokers of flexible office space can count on a buoyant future for the market. Analysts in a recent Research and Markets report noted that “the [flex] market is expected to rebound and make a gradual comeback from 2021 and grow at a healthy rate in the years ahead. Rebound is backed by the expectation that industry players would increase the adoption of alternative business models.” Smaller spaces with lower density will also be popular as tenants seek to reassure employees with environments that offer a lower risk of Covid transmission.

Low-stake leasing

Even before the pandemic, a number of factors were nudging companies towards a more flexible approach to their office leases. The introduction of new global accounting standard IFRS16 in January 2019 is one such example. It put commercial leases on the balance sheet for the first time, which meant that companies where office rental was a major expense had a sharply increased level of borrowing and created an incentive to move to more flexible leasing.

But the more essential reason is that, increasingly, businesses don’t want to be committed to rigid, long-term commitments when the environment in which they are operating moves very fast. As Lim puts it: “Disruptive, modern businesses are finding they need to respond very quickly to the world around them and, for lots of our clients, this means supplementing with freelancers. This in turn means changing daily headcounts, so we need more HQs that are flexible in terms of space and lease.”

Even fewer businesses know how many employees they will need space for in 12 months or 24 months’ time. The situation has been dramatically exacerbated by the Covid-19 pandemic, with many employees now working from home. Companies are unsure when they will return to the office and are now looking at whether a new model for the workplace will be needed in the future.

Short-term gains

Ben Munn, global flexspace lead at JLL, says: “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. Whittling down lease terms is certainly part of that effort.”

Today, the average length of many new office leases is shorter than it’s ever been. In July, JLL reported on this trend, noting that: “In Hong Kong, an average office lease lasts three years. In the UK it’s six. In the US it fell 15% in the first five months of 2020 to seven years – and it’s likely to fall further.”

A more flexible approach to office leases will have other implications for occupiers and owners, of course. For occupiers, it could mean greater certainty about what they are going to pay – particularly under the ‘space as a service’ model where ancillary costs are factored in. And it is likely to mean that owners have to be even more responsive to what the market wants, whether that is in terms of how office space is configured, meeting higher environmental and energy standards, or even the design aesthetic.

One thing’s clear, though. The office real estate market is not going to go back to long-term, inflexible leases any time soon. The genie is out of the bottle and companies will be increasingly nimble in how they exercise their footprint in the workplace.

Find out how IWG is helping businesses of all types find a workplace strategy that suits their needs today