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Market changes affecting commercial tenants

18th May 2021

There are a number of market changes that may now impact commercial tenants post-pandemic.

Whilst a number of these are driven by the downturn in the economy, some maybe representative of an acceleration of change brought upon by the extreme circumstances the UK has endured over the last year.

Importantly, these are simply trends in the leased property market and many not be appropriate in every situation.

The landlord and tenant relationship

It is hoped that the landlord and tenant relationship will become more mutually respectful, as well as beneficial, as time moves on.

Though described as “toothless” guidance, which only encouraged communication rather than providing clear direction for landlords and tenants, the Code of Practice actively pushed for conversations to be had between potentially adversarial parties.

Post-pandemic, this notion of openness must be taken forward into every commercial lease, regardless of whether the dispute is caused by unique property problems, specific business issues, sector struggles or a global pandemic.

Furthermore, many real estate firms have predicted the greater appreciation of the tenant as a customer during their lease.

Though the pandemic has naturally soured the relations of many landlords, tenants and property managers in the short term, it is believed that superior levels of satisfaction will be influential to retaining tenants at properties for the long term, especially as flexibility is on the minds of many commercial tenants going forwards.

 

Sector specific considerations

Office

The office market is certainly geared towards tenants at the moment. Over the coming months, as the pandemic is finally brought under control in the UK, it is believed that there will be a shift in how much space is required and how it is used.

Landlords are likely to pull out all the stops to secure a letting and will use a variety of incentives to do so.

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Retail and Hospitality

Retail parks have become some of the most sought-after locations for larger businesses, with heavy competition from pandemic winners such as supermarkets.

High street retail and hospitality sector rents must come down to entice tenants back. Indeed, central locations have also suffered due to reduced footfall to and from offices, and many retailers, pubs and restaurants based in cities may seek clarity on office market trends before committing to these locations in the future.

Many commentators also worry that permitted development rights will encourage more retail to be supplanted with residential units in the future, with landlords seeing this as a safer bet for returns on investment.

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Industrial

The industrial sector is currently the least tenant friendly. The sector was boosted by the overnight dependence on online retail; many high street retailers also sought to reinvent their business model and dropped their customer-facing space in favour of industrial fulfilment units.

A tenants’ market

The commercial property market is dictated, as many markets are, by the notion of supply and demand. For commercial tenants seeking a new lease in sectors where the supply is high and demand low – such as the office, retail or leisure sectors – the market is currently a very hospitable place to be.

In a tenants’ market, landlords may permit the inclusion of tenant-favouring lease clauses, rent figures, concessions and flexibility into leases that they may have previously denied at all costs.

It may also be possible to negotiate for monthly rent payments rather than the traditional quarterly rent collection, which some tenants may prefer for their cashflow. Indeed, it may also be preferable for the landlord too.

Additionally, new tenants may seek to take advantage of the abundance of space that has been fitted-out by either landlords or ex-tenants to limit their upfront capital expenditure.

However, it is therefore worth highlighting that tenants in the middle of their lease term, who are seeking to dispose of interests in their demise via a sublease or assignment, are generally in a less fortunate position in the current market.

This type of available space is known as “grey space” and there is a huge supply of it in the market at the moment; there are so many tenants looking to remove the cost of expensive commercial premises from their books. Consequently, competition is high, and the deals negotiated between outgoing and incoming tenants must be tailored to reflect that.

Rent linked to turnover

Different rent models were one of the key ideas that gained momentum during the pandemic, particularly amongst retail tenants, where there may be an inclination towards a rent linked to turnover.

Unlike the recent CVA-driven deal agreed between New Look and the majority of its landlords, the turnover agreement will often be combined with a base level of rent due in a hybrid format, rather than on a pure profit share basis.

The formulas for establishing turnover are numerous and the clauses are often tailored to be in the landlord’s favour. These agreements will also require the tenant to open their books to their landlord, allowing them to scrutinise and keep a watchful eye over their tenant’s finances.

It is unclear how prevalent these rent models will be going forwards as normal trade begins to resume.

 

Click here for more information surrounding the post-pandemic future for commercial tenants.

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