JLL: Office Leases Are Getting Shorter; Flex Is Here To Stay

The fallout from the pandemic is still far from over as many U.S. cities continue to battle rising case counts. Some industries have been hit harder than others (hospitality, tourism, transportation), but all have been left scrambling to adjust to a new reality.

With regards to commercial real estate (CRE), there has been no shortage of speculation on how the global pandemic will impact the immediate and longer-term demand for workspace.

Not surprisingly, office occupancy in major U.S. cities dropped precipitously, rent deferrals and relief requests dramatically increased, while millions of employees remain relegated to working from home.

“In some ways, this virus is a workplace virus, it’s an office virus,” said Knotel CEO Amol Sarva on a recent CBS Sunday Morning broadcast. Many U.S. companies, understandably, remain cautious about sending employees back to the office while the pandemic continues to spread.

Source: JLL

A heated debate has arisen about the future of work, the (greatly exaggerated in our opinion) death of the office, and the role of workspaces in a post-pandemic world. While there are certainly merits to both sides of the debate, one thing is becoming increasingly harder to defend: long-term leases.

For commercial tenants, whose leases are coming due and may be hesitant to commit to longer-term arrangements for fear they won’t be able to keep up with their rent or they won’t need their workspace if closures continue to be mandated by local and state authorities.

‘The trend toward shorter leases is riding an accelerated trajectory as office users exercise caution and avoid making long-term decisions in the age of COVID-19,” says Ben Munn, Global Flex Space Lead, JLL.

According to JLL, office leases continue to drop across the globe. In Hong Kong, an average office lease lasts 3 years. In the U.K. it’s six. In the U.S., it fell 15 percent in the first five months of 2020 to seven years -- and it’s likely to fall farther.

These trends seem quite obvious now, as companies are aggressively looking to shed long-term commitments, mitigate their risk and reduce their capital expenditures. The stark reality is that many companies won’t be in a strong enough financial position to make long-term plans, and by agreeing to shorter-term leases, owners can lock in some near-term revenue rather than run the risk of having vacancies on their hands.

“Given the level of uncertainty with respect to the economy and the pandemic, tenants are seeking more agile office solutions,” says Scott Homa, Director of U.S. Office Research, JLL.

Moreover, JLL’s projection for the growth of the flexible office sector remains nearly exactly what it was pre-pandemic: 30%. According to their recently published “Covid and Flex Space Report”:

Flexible space demand will continue to increase as a result of COVID-19, although in a different form than it took before the pandemic. In fact, we believe 30% of all office space will be consumed flexibly by 2030. While there are short, medium and long term implications of COVID-19 on the sector, the future of real estate is a spectrum of flexible spaces.

As we can all agree, it’s a precarious time to be making predictions about the future. But one thing seems fairly certain:

The developments that initially drove the explosive growth of the flexible space market — including real estate portfolios becoming more agile, reductions in lease duration, the need for workplaces to support employee experience and engagement programs, health and well-being in the office and the amenity race within the workplace — will continue to drive demand for flexible space.