In this episode of the Market Lens Podcast, Tom Wallace, CEO of Re-Leased and Laurence Hart from Macquarie Business Bank shed light on the declining length of office leases in Australia, delving into the factors behind this trend and its impact on the market.
Listen to the full episode here:
Here are some key insights from their conversation:
Prior to the pandemic, the average office lease in Australia spanned 3.5 years. However, this has decreased by 29%, now averaging under 2.5 years. Laurence Hart attributes this shift to the macroeconomic conditions and significant global events that have reshaped the commercial real estate landscape.
The concept of flexible workspaces, popularised by industry disruptors like WeWork, has gained prominence not only among serviced office companies but also among other landlords offering similar options. While hybrid working emerged to become mainstream during the pandemic, there has been somewhat of a reversal in perception, with institutions and corporations now recognising the value of a physical office presence. This shift has fuelled demand for shorter lease terms as businesses strive to strike the right balance between remote and in-person work.
Volatile economic conditions, fluctuating consumer spending, low consumer sentiment, increased mortgage payments, and rising house prices have created a climate of uncertainty that influences occupiers' lease decisions. Laurence Hart highlights the impact of these macro factors and emphasises the need for businesses to prioritise flexibility in their real estate commitments. This preference for shorter leases allows companies to adapt swiftly to changing circumstances and mitigate risks in an unpredictable business landscape.
Another significant factor mentioned is the change in accounting standards since 2019, where tenants are now required to include lease liabilities on their balance sheets. This has led to an incentive for companies to have shorter leases, as longer leases would increase balance sheet gearing and decrease asset value.
Recognising the growing demand for flexibility, some office landlords have seized the opportunity to offer shorter lease terms. Smaller office spaces, akin to those provided by WeWork, have witnessed a surge in lease inquiries, particularly in cities like Melbourne. Laurence Hart notes that when tenants sign shorter leases, they are more likely to stay and renew their leases, creating stable cash flow for the office market. This stability appeals to businesses seeking long-term valuations and reinforces the notion that a well-suited workplace can foster loyalty and reduce tenant turnover.
Sustainability and environmental considerations have become crucial factors in lease length decisions. Laurence Hart points out that institutions and government tenants, driven by sustainability goals, are increasingly focused on occupying green buildings. Longer leases align with their commitments to reduce carbon emissions and report positively to shareholders, stakeholders, and customers. The limited availability of such sustainable spaces, particularly in cities like London, has prompted tenants to make substantial commitments and secure desirable workplaces.
The changing landscape of office leases in Australia reflects the profound impact of the COVID-19 pandemic and the evolving priorities of businesses and landlords. Shorter lease terms offer flexibility in an uncertain business environment, while the demand for in-person collaboration fuels a resurgence in office occupancy. Landlords who embrace this shift and provide flexible, sustainable workspaces can attract and retain tenants, while businesses navigate the evolving commercial real estate market with agility. As Australia adapts to the new normal, the redefined office lease lengths serve as a testament to the resilience and adaptability of the business community in the face of new challenges.
