How Will Covid-19 Change The Future Of Commercial Leasing
The ongoing pandemic has encouraged organizations to explore the viability of remote working in the context of their current business models. Some will find that they no longer require the same amount of office space they previously needed. These businesses may choose to implement permanent work from home arrangements or introduce rotating rosters where staff use the workplace on a shift basis, potentially reducing their demand for office space.
Nevertheless, while a reduction in office space may bring about cost savings, much has also been said about the side effects of telecommuting in achieving business goals.
Working from home means that employees have less opportunities to physically collaborate as a team for brainstorming and ideation purposes. Without a functional office, the quality of their work could be affected.
The workplace is also a place where companies foster their corporate identity and organizational culture. Thus, the absence of a professional environment makes it difficult for business to liaise with clients, and to attract and retain talent.
Most organizations will hence be averse to moving away from the traditional leasing model as a result of the drawbacks of long-term remote working. Instead, companies will want greater flexibility in their leasing agreements to accommodate the changing demands for office space, and to better with future pandemics and other economic uncertainties.
As a direct consequence of the pandemic, organizations can look into securing a break option from their landlord. This clause will give both parties the right to terminate a tenancy before the lease officially expires, in accordance with certain conditions being met. Organizations may also request to have this list of requisite criteria reduced and push for a shorter termination notice.
These risk control measures are often put in place to safeguard business vulnerability. They help to ensure that businesses are successfully released from their lease obligations without a redundant liability to drain their cash flows during an economic downturn.
Lease terms may also be very different going forward. Organisations are expected to favour shorter-term leases over the usual two- to three-year duration for a smaller commercial space, or between five to six years for a larger office. This will allow businesses to respond more quickly to economic shocks such as the current pandemic and avoid being tied down by costly rental payments on space they do not need.
Other recommended tenancy terms that companies may wish to negotiate with their landlord include rental waivers and rental deferrals. A rental waiver generally involves an agreement wherein landlords do not collect rent or only partial rent for a specific timeframe. With rental deferral, tenants can defer a portion of their rent until a later time before paying it off under a repayment plan.
Both clauses are designed to protect struggling businesses from taking a further hit in times of economic crisis, as they would not have to worry about making rent for a designated timeframe.
Aside from tenancy agreements, there are other ways to increase the flexibility of office leases.
Organisations could request for flexibility in reconfiguring the office layout according to their spatial needs and sublet the excess space as seen in the coworking model. In view of the current pandemic, organisations also have the autonomy to design the office space to address social distancing and safety concerns. Some basic design solutions may include creating more private spaces for staff and greater distances between individual workstations.
The coworking model is ideal for third party companies and permanent remote workers in search of a more cost-effective alternative to leasing a conventional office space. It is also suited for businesses looking to downsize from their office space with long lease terms into a flexible office space without a fixed lease term.
In this situation, both the main tenant and sub-tenant stand to benefit from a flexible lease agreement.
Given the current pandemic, organisations need to seize the opportunity to reduce their commercial leasing costs. This will involve working out market-level lease rates and negotiating reduced tenancy agreements with landlords to provide businesses with a temporary buffer amid this recession and other unforeseeable economic shocks.
There is also a need for businesses to assess the long-term feasibility of remote working to gauge just how much workspace they require. Based on occupier demand, businesses can restructure their workplace in a way that allows them to respond swiftly and effectively to future crisis.