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It comes as no surprise that tech giant Meta (formerly Facebook) has decided to terminate its lease on one of two buildings in the British Land development in London’s West End.
Big tech companies’ aggressive hiring and expansion plans have suddenly been reversed. Whether on the West Coast or in the West End, its employees have embraced remote working. London’s long and expensive commutes mean “hybrid” working styles are more durable than in other European markets after pandemic restrictions are imposed.
Interestingly, a company that was only founded in 2004 signed a 20-year lease with no break clause – the company paid the contract equivalent of approximately seven years’ rent before it could exit. This long-term, rigid leasehold approach is starting to feel like a relic from another era.
Ever since the pandemic proved that not everyone needs an office, certainly not all the time, people have often predicted the end of the office. Jefferies noted last week that London’s vacancy rate is at its highest level in 30 years, putting pressure on rents. Tenants have slashed their space needs, demanding better amenities and greater flexibility.
“COVID-19 has made people’s desire for flexibility even stronger,” said Marie Dormeuil of Green Street, an industry analyst. “The office is a very lethargic industry. Its operations have become more intensive.”
This is especially true in the top markets, where blue-chip stocks take up a lot of space in expensive “greenium” buildings with the best sustainability credentials. The scarcity of environmentally friendly buildings means landlords still dominate; companies spending money to renovate their headquarters also want to have certain rights to use it.
But even so, 15 years is still the new 20 years. Clifford Chance is leasing 320,000 sq ft for its new city headquarters on a 20-year lease with a 15-year break, but also includes a near-term option to hand back the space, plus a further two years of the lease. Option to discontinue certain floors during the lease period.
Beyond this rare category, the market is constantly changing. London has always distinguished itself when it comes to landlord-friendly leases: the average lease in the city’s prime locations is 10 years, according to Savills, compared with six years in Paris, five years in Berlin and three years in Madrid. Across the market, lease terms have shortened significantly in recent years.
This is partly down to the rise of flexible office spaces such as shared and serviced offices, which (due to the market’s stubborn traditional structure) account for a larger share of the London office market than other European cities. However, the mid-level market is also placing higher and higher demands on landlords. British Land owns fully managed office brand Storey, while Land Securities plans to triple the size of its flexible product Myo this year.
Great Portland Estates wants at least a quarter of its portfolio to be flexible, with smaller offices likely to be leased for shorter terms, perhaps three to seven years, with fit-out and full building services typically provided by the landlord. “The real estate industry is starting to offer some of the benefits of outsourcing and technology to make clients’ lives easier,” said GPE boss Toby Courtauld.
Frankly, this makes the job of an industry much harder and more expensive, whereas previously the industry might have largely ignored tenants once they signed on the dotted line. Office valuation and financing have always been based on long-term, predictable leases that must be adjusted for greater risk. But so far, the industry has managed to increase the price of flexibility and services, helping to support overall market rents.
This demand for flexibility may start to filter into major parts of the market, with blue-chip tenants choosing to complement core space with flexible alternatives. Occupiers are less willing to pay for “just in case” space, especially after being plagued by too much space in the past. Landlords say existing traditional tenants are interested in excess or occasional space in flexible offices designed for smaller companies.
In a post-pandemic world, it’s not just office workers who will need a hybrid approach.
helen thomas@ft.com
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