Businesses ride out uncertainty with office lease extensions

Real estate contracts are being deferred while landlords and tenants await clarity over the new normal

July 01, 2020

Companies are taking advantage of lease extensions and flexible space as they deliberate their office requirements amid new distancing protocols and work-from-home policies.

In Australia, 12 percent of office leases are due to expire in 2020, according to JLL data. But as a result of ongoing economic uncertainty, a majority have been extended into 2021.

The breathing space is stemming from legislation that governs how commercial landlords engage with tenants, says James Montague, director, office leasing - Queensland, JLL.

“The global pandemic has spurred legislative implications that mean that you can't kick a tenant out,” he says. “But landlords are being pretty flexible with their occupiers and hoping to find a solution within their portfolio.”

Larger organisations – which have capital constraints and lengthy internal approval processes – in particular have been deferring leases. Yet many smaller organisations are hoping to be rewarded for taking a bolder, opportunistic approach.

Eager to lock in a deal, landlords are offering delayed lease commencements, or working with tenants to construct and design COVID-compliant fit-outs for a quick move-in, Montague says.

“COVID deals are hard to quantify because we just don’t have the transactional evidence to support any increase in incentive at the moment,” he says. “But from the negotiations at play landlords are offering higher incentives such as rent-free periods, or capital, to get deals closed out quickly.”

Keeping it flexible

Firms that can commit to leasing office space in the short term are taking advantage of increased flexibility. As they take a fresh perspective on their real estate strategy, they are future-proofing their choices by opting for buildings with overflow space to remain agile and accommodate distancing rules, says Kate Pilgrim, director, tenant representation – Victoria, JLL.

“Both bookable and non-bookable space is being utilised,” she says, in JLL’s Perspectives Podcast. “A lobby, for example, or ground-floor business lounge that will be able to accommodate extra workers, or informal meetings, just in case they don’t get their space requirement right.”

With expenditure and resources constrained, smaller businesses with requirements under 500 square metres are leaning towards fully fitted-out office suites, with a focus on short-term leases with contraction, expansion and break rights, Pilgrim adds.

A new dawn for the office

With much of the workforce now logging in from home, many businesses are rethinking the role of the office.

For those who can work from home, between 41 and 60 percent of people would prefer to do this two or three days a week on an ongoing basis, according to a survey of 1,000 Australian workers, from Boston Consulting Group.

However, it’s not for everyone. In a JLL survey of 3,000 workers across the world, half of respondents said they struggled to be productive, citing a lack of a professional environment, poor ergonomic work station, and being unable to concentrate.

A hybrid workplace model, including home offices, flexible-work space, satellite offices, and headquarters, will be the mark of a future-fit organization. The right balance will be different for every company with optimal human performance the end goal, the report says.

The sudden and extreme shift in work behaviour reflects a “major cultural inflection point” that is accelerating conversations around office design, says Anthony Walsh, design director – Australia, JLL.

“There are CEOs connecting informally with parts of their business, having conversations that are far more useful than what they’ve ever had in the pomp of a boardroom meeting; highbrow institutions talking openly about dramatic new workplace models; and business owners with entrenched views about their office layout, buying into agile working. It’s an exciting time to be talking about the role and purpose of physical offices,” he says.

For all the benefits of working from home, the office will remain an irreplaceable source of human connection and inspiration.

Sixty percent of employees have missed their office substantially during lockdown, the JLL survey found, with 44 percent stating that they missed the human connections an office provides, demonstrating that the rise of remote working will not be the death of the office, but an opportunity to redefine its purpose.

Business leaders should resist the temptation to react solely to the immediate implications of social distancing and the economic slowdown, says JLL’s Montague.

“If you’re thinking of carving out 30 percent of your workforce so they’re now permanently working from home, come Christmas party time, there will be a lot of unfamiliar faces because the engagement you had as an organisation got lost,” he says.

“Office life gives people invaluable structure and rich and dynamic human interactions that can’t be reproduced remotely.”