Key emerging real estate trends and a market update were on the agenda for a Counsel+ Real Estate roundtable event on 9 March. Partner George Panteli and Legal Director Angela Mildenhall hosted an online roundtable discussion for in-house lawyers who are focused on real estate.
Covid, Brexit, Ukraine War, Liz Truss, are all issues which have had an impact on the uncertainty of the economy and in particular on real estate decisions. The roundtable focused on discussing some key market issues.
Agile / hybrid working
Office space requirements are now decisions being driven by agile / flexible working arrangements. During our roundtable we found some businesses aren’t settled on their hybrid working policy yet, as they are monitoring employee satisfaction, retention and productivity. It is therefore difficult to commit to long term leases if there is uncertainty over desk number requirements. There is a nervousness.
Decisions had already been made in some organisations to consolidate office space and just retain a couple of key offices. This was in line with a hybrid working policy they now felt they had committed to.
Businesses with retail or other type of consumer space said they had to remain committed but were keeping things short term, such as renewing leases for five years.
The market is shifting rapidly in terms of adopting green leases and our roundtable guests shared their experiences where green clauses were previously a couple of paragraphs, but are now extending in to three pages. The roundtable discussed how difficult the provisions are to adhere to from the tenant perspective and in negotiation, it is always the last thing to be agreed. For tenants its an additional obligation, results in increased costs and impacts the business.
In some retail spaces, where managers of stores are focused on profitability, our roundtable guests explained that this contradicted with the landlord’s requirement for them to spend time attending green meetings with fellow occupiers.
The clauses in lease renewals were proving to be a double-edged sword for some organisations. Businesses don’t want to give financial commitment but do want to be seen to be green, to comply with their own ESG values and targets. The provisions are meaningless if no liability, but how do you mitigate liability!
There is a Government consultation now which is looking at by 2028, minimum EPC rating would be a C. Could there be the potential for tenants to share the cost?
Adapting business models
Some businesses on our roundtable explained how they have shifted their business models by no longer looking at long leases but instead turning to office space providers who can provide short term lets. But these companies carry the risk.
National Rail services in London (London and South East franchised operators) is updated quarterly, with the latest available data from April-June 2022 showing that journeys at that time, as the impact of the prolonged industrial action was starting to be felt, were at about 74 per cent of the pre-pandemic levels. By comparison, recovery at the Great Britain level as of October 2022 was at around 85 per cent of the pre-pandemic baseline. The decline in commuter numbers in London (and a better bounce back overall in the UK) has turned some businesses attention to investing in regional offices again. There was a discussion about whether this was a long-term trend, or in a few years, will the economies of scale debate in businesses, mean small regional offices are not renewed.
Investing in property fit out for a short-term lease in terms of capital investment was still of importance. Staff expect the same high quality fit out, even if it is short term, therefore costs should not try to be saved in this area.
2023 landmark year for real estate
With upcoming and new legislative changes already in force in terms of OEID, EPCs and MEEs, new law coming in to help charities dispose of land more easily, biodiversity and the new Building Safety Act, there are many measures for businesses to consider in 2023 and beyond. Our next roundtable may focus on some of these changes and how they are impacting real estate businesses.
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