According to recent survey conducted by Tenant Representation Services, an overwhelming 90 per cent of commercial tenants believe having a flexible lease is reasonably or critically important for their business.
A flexible lease is less rigid and structured, and may include the ability for tenants to downsize or upsize the space, an option to renew after a short period, or the choice to break the lease.
The preference is fuelled by the view that flexible leases allow tenants to better adapt to changing market conditions, with many respondents pointing to the uncertainties of doing business and changing economic conditions, as key factors.
68 percent of respondents indicated a preference for a short lease (three years or less) with more flexibility but less incentives, and 60 per cent would even pay a premium cost for a break clause in their lease allowing them to limit long-term rental liabilities.
Only 20 percent of respondents would pay a premium cost for expansion rights to adjacent or continuous space. Yet, 58 percent would pay a premium cost for the ability to downsize their tenancy at any time.
The results reveal that Australian businesses are more concerned about the potential need to reduce rather than increase their office space.
This may point to diminishing confidence in the economic and market conditions in the short to medium term. It may also relate to a decreasing dependence on larger office space as a result of changes to how we work. Mark McGrath, Principal at Tenant Representation Services suggests that contemporary office environments reflect changing expectations around how we work and how much space we need, contributing to increasing vacancy rates. “Activity based working models incorporate various work spaces geared towards work activities rather than towards assigning personal space for each employee. Offices will offer a variety of work areas such as hot desks, quiet concentration areas and collaboration spaces,” McGrath said.
McGrath added that the results reveal that flexibility will become the new norm in commercial tenancies.
“In highly competitive economies and rapidly changing industries, short term leases are preferred by tenants over long term leases. For example, it is common in Asia to lease commercial space over two or three years with options to renew for a further two or three years.”
“We’re seeing this trend play out in the Australian environment. Nowadays, the most important factor for Australian tenants is flexibility which gives them options should their circumstances change in the short, medium and long term.”
“Tenants are well aware that business is uncertain and highly changeable, especially in the current economy. They need their commercial tenancies to be able to adapt to these conditions to ensure their businesses remain viable and competitive.”