A new market report shows commercial property tenants are benefitting from shortening lease lengths while rental defaults hit an all-time high. The research comes from IPD and covers a 12 month period to June 2013.
Challenging market conditions have driven down lease lengths as landlords compete to offer attractive terms to occupiers. The average lease length currently stands at 5.8 years, down from 7.8 years a decade ago. In fact over 80 per cent of leases signed in the period were below 5 years compared to just 55 per cent in 2003.
At the same time the figures reveal that landlords have lost 6.2 per cent of their income due to the record number of defaults and business insolvencies.
Along with shorter leases, landlords continue to offer incentives despite a marked improvement in the overall economy. Rent free periods have reached an average of 9.5 months, double the length on offer 10 years ago. In the regional office markets outside the South East the average rent free period is even higher at 13.5 months.
Managing properties when leases expire is also proving difficult for many landlords. The research shows that 60 per cent of properties remain vacant for three months or longer when a lease expires. As a result a high proportion of landlords are forced to agree to reduced rents on re-letting.
Colm Lauder, an associate and consultant with IPD, says that landlords are doing anything they can to avoid costly voids and maintain their income streams. But he argues that, while the market continues to favour tenants, today’s shorter leases could be beneficial to owners in the long term.
“Property is of course cyclical, meaning this is not necessarily a bad thing. Shorter leases will allow landlords to re-let for higher rent in future, especially when active management is taken into account.
“But it shows that although confidence is improving around the commercial property market, occupiers are still calling the shots for investors,” he says.
Ian Fletcher, policy director for the British Property Federation (BPF) – which jointly sponsored the report – believes the prevailing trend is towards greater cooperation, transparency and flexibility which, he says, “can only be good for occupiers.”
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