Home AEC Report: Tenants Will Want More Flexibility and Likely Less Space

Report: Tenants Will Want More Flexibility and Likely Less Space

VTS Global Office Landlord Report
Photo by Joel Mott on Unsplash

By Vladimir Bosanac

It is perhaps in great anticipation that the commercial real estate industry is awaiting the fall. Some businesses have announced return to work deadlines, some have recently pulled back and others are still trying to evaluate the best way forward. It is not a foregone conclusion that all businesses want to return back to the offices in a way they operated in February of 2020, and it is not clear if flexible work arrangements will work for others, either. Yet, some indications, according to a recent industry study, seem to point to a few trends that indicate companies will require more flexibility in their lease terms by either looking for shorter leases and more turnkey spaces while at the same time requiring less overall space and more room for those employees who will be in the office.

New York-based VTS, which just completed its second Global Office Landlord Report, interviewed 154 office landlords that together represent 5.3 billion square feet of commercial assets. The companies interviewed were not specifically named, however all were budget decision-makers in commercial office real estate leasing. Just over half of the responders represented office or mixed-use portfolios larger than 15 million square feet, and about 80 percent worked in the U.S. while the remaining 1/5 were abroad.

In the findings, VTS outlined some of the biggest learnings from the feedback, and most revealed an industry still looking for answers and ways to understand how their office needs will shape in the future. The study also found that tenants, at least in the immediate aftermath of the COVID-19 pandemic, were less focused on amenities and more on resolving the financial impact of the leases. “During this crisis, a large majority of the landlord-tenant relationship has been about managing issues critical to tenant operations – rent relief and deferments, and the safe return to the office,” stated the report.

As a result, 65 percent of the respondents agreed that lease terms for new requirements will be shortened in 2021. The uncertainty of the pandemic and its impact on its labor force as well as the evolving business plans means companies want to be able to react to the changing nature of working and not be stuck with offices that are underutilized and not necessary.

This was also the case with existing tenants. Nearly half, or 45 percent, of the respondents estimated that tenants will have smaller requirements in 2021, and 65 percent of the people surveyed expected lease terms for renewals to decrease, as well.

It could be concluded from the data then that corporate tenants are not done evaluating their current needs. How much of an impact this will have on the industry and how much of a decrease in demand occupiers seek was not clear from the findings. However, if a landlord is facing half of her portfolio under review with demand shrinking, it may have a financial impact on the operations of the entire portfolio.
This was especially true in cases where landlords have been investing in upgrading their facilities in order to facilitate faster return to work. “Landlords overwhelmingly say tenant communication is a top priority for 2021 and that they’re executing on major building investments to improve safety in their buildings,” the report said. These investments include building management systems, touchless building entry and air filtration systems, although it was not stated how much more landlords were spending in this area and if any impact these investments have on the safety of the occupants.

Yet, the landlords are getting strong feedback on occupier flexibility and a large portion of the responders indicated that they are pursuing alternative uses for their space. “…even after the implosion of WeWork and effects of COVID-19, landlords are still showing a significant commitment to flex space,” according to the report’s findings.

VTS found that nearly 70 percent of the group surveyed indicated that providing flexible leasing options will be a more important part of their leasing strategy. And while in the first iteration of the survey conducted in 2020 most of the landlords – 81 percent – looked at allocating less than 10 percent of their space for flexible and co-working operations, in 2021’s report that number dropped to 52 percent. Nearly 30 percent of landlords are now considering 10 to20 percent of space allocated to flexible uses, and another 19 percent are looking to convert over 20 percent of their space to these types of needs.

The report did not indicate if this space will only be provided in existing properties or if additional locations would be added to the landlord’s portfolio. However, this change of priority indicates the industry’s recognition of changing occupier needs and where some of the need from the corporate users is going to focus.

In conclusion, the report’s main message is that uncertainty in the industry will be its defining characteristic for some time. “In the short-term, industry leaders will need to become comfortable with uncertainty. Balancing business recovery, identifying new opportunities, reinventing tenant relationships, recalibrating exposure to risk and focusing on employee wellbeing all have added weight during this unprecedented time,” the report states.