All time low

The decline in the office rental market has been well documented across the property press and it is widely known that the market this year has favoured tenants over landlords. Now a recent survey has backed this up in its findings that the average lease for a small business is now just five years – a fall of 10 months.

The research, carried out as part of the BPF/IPD Annual Lease Review, used the details of 91,000 tenancies to form an all-encompassing view of the current rental property market. The results of the research show that businesses are choosing now to go with shorter leases. Of those tenancies surveyed, 81 percent were five years or fewer and therefore unlikely to face a rent review. In comparison, just over three percent of small businesses had a lease over 10 years. As such tenants, it appears, are now less likely to be tied down to one location.

With property rental accounting for an average of a third of most business’ costs, it is not surprising to see figures reflecting this. Rent costs on office property crashed during the early part of 2010 and have only really seen significant recovery in prime property. As such, businesses have found it easier to arrange low rents from new landlords attempting to avoid empty rates than to try and renegotiate rental deals at rent review, which traditionally have been reviewed upwards only.

This point of view is supported by the rise in rent-free periods for those agreeing leases in the past year. This period has risen to an average of 10 months per lease, though in the office market this has risen to an average of 14.5 months. There has also been a 30 percent increase in the number of contracts including break clauses which suggests that both tenants and landlords want the option to renegotiate better deals during the period of a lease.

When broken down, the research indicates a favourable position for retail property owners, with an average lease length of 5.4 years, reflecting its relative recovery from the downturn. In contrast the hard hit industrial property section has an average lease length of just four years.

Though the recession has played its part, the move towards shorter leases reflects a long term trend in commercial property rental. Reductions in tenancy length have been dropping year-on-year for the past decade, suggesting a significant long-term shift in the mentality of those in the commercial property market and the wider economy. As a measure of this fact, the data collected by the BPF/IPD review showed that lease lengths have halved since the Conservative Party was last in Government back in the 1990s.

“Leases have changed significantly over the past two decades with profound implications for landlords and tenants”, explained Liz Peace, Chief Executive of the British Property Federation. “For small businesses, shorter leases are probably a good thing, with the pace of business changing so fast these days it makes little sense for most small and medium sized businesses to tie themselves into the obligations of a long lease. Shorter leases have undoubtedly meant fewer businesses found themselves in trouble during the recession and therefore were able to survive it”.

The economic events of the past three years appear to have had a real impact on the way businesses approach property. Those negotiating leases want increasing flexibility over the length that they are contracted within a property. Coupled with the recent rise in prominence of managed office space operations also suggests small businesses are thinking more about what space they need as well. With the secondary property market still very much in a position that benefits those renting over landlords, the trends illustrated by the report look set to continue.