COVID-19 responses in the commercial leasing market

The National Cabinet released a Mandatory Code of Conduct for Commercial Leasing (the Code) on 7 April. The Code raises many questions for the industry. The Code’s intention is that its principles should apply in spirit to all leasing arrangements for affected businesses, having regard to their size and financial structure.

We are in daily communication with our clients, commercial property landlords, agents, consultants and tenants. From those discussions the following industry insights have emerged in response to the Code and the immediate commercial leasing environment.

Leasing agents and consultants

Leasing agents and consultants report that as a result of COVID-19 most organisations have either put future accommodation briefs on hold or dramatically reduced the size of space required. Remote working has highlighted the ability of businesses to decentralise their workforce and has forced businesses to reassess their future space requirements.

Market uncertainty means there are no metrics on which to base any decision about market acceptability or deals given that forward prospects for income and trading conditions are unclear. Businesses are attempting to answer questions about the future but have no playbook on which to rely. Questions such as how deep will the recessionary impact be? How soon will the market recover and when will that recovery start? What will the overall economic landscape look like when the market returns to “normal”? Will the responses of businesses to COVID-19, such as working remotely and reduced need office space, become the new norm once the crisis is over? Will the business continue to operate efficiently under the COVID-19 isolation rules?

Office tenants

With office tenants running their businesses remotely, many are waiting to see how that approach will impact on their business. Essentially, they are looking to see how the current arrangements pan out before locking in future commitments to take more space or expand offices. Leasing agents tell us new tenant enquiries have slowed considerably or in most cases are dormant. Where possible, tenants who had accommodation briefs in the market have either pulled the brief, deferred the project, reduced the space requirement or abandoned the project altogether. Subleasing where possible is an option and businesses are attempting to lease excess space to reduce occupancy costs.

What does the market look like in the longer term?

Some landlords are realistic and accept the recovery in the office leasing market will not be swift and may take considerably longer than expected. Others remain optimistic that the recovery will commence sooner rather than later when things return to normal. However it is difficult to see how the economy will bounce back with enough vigour to support that optimistic view.

As competition for tenants with strong leasing covenants increases, there will be a swing to a much more favourable leasing environment for tenants. Certainly our landlord clients have indicated they will take a cooperative and conciliatory approach to retain their tenants. So tenants can look forward to a much better environment in the short term. Tenants who agreed on pre-COVID-19 terms will be looking to either re-price or reset those deals or even terminate if possible. The COVID-19 working arrangements forced on tenants will encourage them to assess flexible working arrangements with the long term view that it could deliver future occupancy cost savings beyond the isolation period.

So while the Code is mandatory, market forces, management and longer term planning will have a much greater effect on shaping the market.