Flexible leases, greater services: Covid accelerates shifts in office market

Experts on recent TRD Talks Live describe “hotelification” of office market as longer lease terms fall out of favor

TRD NATIONAL /
Jul.July 17, 2020 05:40 PM

In the office market, the pandemic has proved the “great accelerator.”

That’s according to Susan Freeman, a London-based partner in the real estate department at Mishcon de Reya, who joined Nelson Mills of Columbia Property Trust to discuss the future of office for a recent episode of TRD Talks Live.

The executives said that in both the U.K. and U.S. markets, gradual shifts toward flexible leases and greater services — prompted at first by competition from co-working and flex-office companies — had sped up with the pandemic, as traditional office landlords responded to a rapidly changing environment.

“We’ve learned that tenants will reward the extra service,” Mills told moderator Hiten Samtani, The Real Deal’s associate publisher. “More importantly though, the flexible lease term. Tenants will pay large premiums for that.”

Freeman anticipated more “hotelification” of the market going forward, noting that property is viewed more as a service than a commodity.

But she took a measured view of the industry’s long-term prospects.

“There’s a lot of hype around the death of the office,” she said. “It’s quite possible that the change is less than we think it’s going to be at this stage.”

While states such as New York have gradually begun to reopen, much of the country’s workforce is still working from home, and landlords are now considering how to accommodate tenants in an era of social distancing and heightened safety concerns.

Mills, whose portfolio was mostly leased for the next few years, said short-term changes centered around cleaning standards, social distancing and PPP. In the long-term, he said his company was looking closely at air quality and filtration systems across its portfolio.

It remains to be seen whether the shift toward remote work will be permanent.

Mills noted that his company counts Twitter among its larger tenants. Despite the tech company’s announcement that it will move toward remote work, “We don’t expect them to reduce the footprint of the office,” he said.

The real focus for landlords, he said, will be on offering greater flexibility and services at their buildings. Long term leases had been falling out of favor for a while, he added.

There was also ambiguity about how the pandemic will affect rents and valuations.

“It’s safe to say that valuations have come down,” Mills said. “How much and for how long is really difficult to answer.”

Write to Sylvia Varnham O’Regan at [email protected]


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