Occupiers may be booted from driving seat in some markets, warns CBRE

Occupiers are still in the driving seat in the commercial real estate sector, but now is the time to engage with landlords over real estate commitments as current occupier opportunities may not last long in some markets, according to a new report by CB Richard Ellis.

With falls in rental value rather than rising yeilds driving the current phase of the market, landlords are increasingly open to discussions that will help secure income continuity and avoid the costs and uncertainty of re-letting.

The international adviser claims there is growing evidence that tenants across all sectors are deploying a range of tactics to secure the best possible lease terms. Various different strategies are being pursued, it added, with occupiers obtaining rent reductions/cash premium in exchange for a longer lease or rolling lease extension; a unique local lease structure or legal provisions; and waivers of existing break options in exchange for longer fixed lease terms.

Occupiers are also renegotiating shorter leases or sale and leaseback options for capital-raising; subletting surplus space; buying in leases from distressed landlords; implementing (or threatening) relocation plans; obtaining additional rent-free allowances, expanded fit-out or other contributions; and obtaining earlier break options than provided for in the current lease.

In markets with greatest potential for recovery in values, the opening for occupiers to take advantage of present market conditions may not last long, CBRE warns. 'As a result, each market and individual opportunity needs to be viewed on a case-by-case basis, considering local market conditions and specific landlord circumstances, in order to develop a proposition that is likely to be mutually acceptable.'

Richard Holberton, Director, EMEA Research & Consulting, CB Richard Ellis, said: 'The range of tactics available to alert occupiers in the current market is potentially extensive, and can produce benefits in relation to costs, liabilities or lease terms. There is no universal formula for occupiers trying to optimise lease negotiation outcomes, but early planning and action and an awareness of the individual landlord's position and concerns are critical.'

'Tenants who have a lease break or expiry in the next two years stand to benefit most from the current conditions, but the landlord’s position will eventually strengthen as the choice of space is eroded over time by the slowdown in new office developments coming to market,' Holberton continued.

The favourable occupier conditions have been reflected in CBRE's recent work with corporates across Europe. Matthew Pullen, head of CBRE’s Global Corporate Services in EMEA, commented: 'We've been seeing much more proactive engagement by corporates who are looking at their current position at portfolio level, particularly seeking rental rate reductions and space savings in line with falling market conditions.'

'Specifically, as part of a new engagement with a global technology company, we have just completed a market review of all of their 350 leases, during which 50 properties underwent a detailed financial review. As a result, we now have 20 active projects providing approximately EUR 5 mln of annual operating cost reduction.

'Besides rental rate reductions, we have also released space in two locations and identified further opportunities to relocate from two buildings to similar space for significantly reduced expenditure. This example alone demonstrates that, if tackled proactively and with the right market knowledge, the current conditions can have a significant impact on occupiers’ bottom lines,' concluded Pullen.