News and Views

Willing....But Able?

Following a number of large transactions towards the end of 2010, bold predictions were made regarding take up and rental growth within the City office market in 2011. However, this has turned out to be somewhat of a false dawn and the City office market continues to present attractive opportunities for footloose occupiers considering relocation.

For the “willing” occupier unfettered by a current lease, a warm welcome awaits from landlords. The basket of inducements can include “dealing” rents much lower than quoting levels, inducement packages (offering two months rent free for each year of occupation)and/or lease flexibility to break in say three or five years.  For companies boasting a strong balance sheet, some landlords will offer to fund fit-out costs with minimal requirements for security deposits. The City also continues to offer the lowest Central London outgoings as compared with West End and Midtown equivalents.

So whilst trading conditions for most City companies remain difficult, the property market still offers the best opportunity since the early 1990's for tenants. Indeed that era saw a slow reaction to the oversupply of offices whereas today’s landlords have responded quickly and positively. We expect this to be reflected in the statistics for the second quarter of 2011 which will show a much higher level of take up led by the likes of major 100,000sq ft (c.9,300 sq m) plus lettings to  CMS Cameron McKenna, Mace and Schroders.

However it is not all roses! Many occupiers are not able to capitalise on the opportunities as they are tied into lease obligations with little or no chance of surrendering. The option is to re-let unwanted accommodation and become an "accidental landlord" but this path requires the offer of similar inducements in order to attract new tenants. To add pain, the Government’s change of policy on “rates relief” for unused or empty property has doubled the holding cost. The other reality is that moving property ties up invaluable capital (in this credit crunched world) and exit liabilities (e.g. dilapidations) are “cash out costs” that narrow and can often reverse the benefit of even the most generous inducement to move.

All is not lost however. Over the past ten years many UK companies have moved to shorter term leases or have break options. Many landlords faced with the fear of having an empty property will offer rent free periods and renegotiated lease terms in order extend the stay of their existing tenants. However many occupiers fail to appreciate this opportunity and the strength of their negotiating position; or simply leave it too late to start the discussion.  A 12 month head start is usually needed before a lease expiry or break option in order for constructive discussion to take place with a landlord.

Our conclusion is that occupiers should take an active look at their situation, and together with their professional advisers should seek to exploit the opportunities presented by the present market ….  where they are willing and able to do so.

To discuss your company’s property situation in more detail please contact David Alcock or Jon Beilin

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