European Office Markets Experiencing Seismic Shift in Landlord-Tenant Relationships

European Office Markets Experiencing Seismic Shift in Landlord-Tenant Relationships

Commercial News » Commercial Real Estate Edition | By David Barley | December 6, 2011 8:21 AM ET

Based on Jones Lang LaSalle's Offices 2020 Report, a seismic shift between the traditional landlord-tenant relationship is underway. According to the report, 80% of real-estate industry executives believe tenants are becoming more powerful and demanding more from their landlords and investors.

Benoît du Passage, Managing Director - France and Southern Europe, Jones Lang LaSalle and executive sponsor of the client project tells the World Property Channel, "Tenants recognize they are in a stronger negotiating position than ever before and are revisiting their real estate strategies to ensure their workplace is working harder for their overall business."

"The shift in the balance of power is changing the property landscape, leading to more collaboration between landlords and developers. We expect the shift of power to tenants will continue for at least ten years, ahead of cyclical trends."

Bill Page, Director, EMEA Research, Jones Lang LaSalle who is leading is the research programme added, "There has been a paradigm shift in the European office market as it is now so strongly influenced by the demand side. Tenants have a tremendous negotiating position in the market and can influence what gets built. Their brief can become much more detailed − from location, capacity, density, sustainability, security and air conditioning right down to the sprinklers. Furthermore, flexible, long-term partnerships with developers and out-sourced service providers will lead to better outcomes for both parties, especially in the absence of debt funding."

He added, "With careful upfront investment, all sides can benefit. The cutting edge lies in developers' ability to build long-term partnerships with their clients and out-sourced service providers, anticipating their needs and locating and configuring space in a way that adds value. Besides, funding for office development is unlikely to return to pre-2007 volumes, so inventive collaborations with corporate clients will be required to fill the gap."

On top of this trend, lease lengths are declining as tenants want more flexible workplace strategies. The average Central London commercial office lease has fallen by 50% in the last decade, from 12.7 years in 2001 to 7.9 years in 2011.  Average lease lengths in core Western European markets are expected to fall to five years by 2020. This will increase churn as occupier leases expire more quickly and more often - although net absorption - the growth in occupied stock - may fall as space is occupied more efficiently.

Benoît du Passage concluded, "Tenants need efficient workplaces and are not shy in asking for what they want. Developers need high-quality tenants. Because property has risen up the corporate agenda, landlords and tenants need to foster a true partnership approach as this will benefit both parties."

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